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Tag: financial planning

7 Compelling Reasons for Roth Conversions

Many people spend decades building the largest possible retirement account, only to discover they’re facing significant tax challenges in retirement. If you’ve saved north of seven figures and are approaching or already in retirement, you might be wondering whether Roth conversions make sense for your situation.

The truth is, Roth conversions aren’t the magic solution that some financial media personalities make them out to be. However, there are specific situations where converting your traditional IRAs or 401(k)s to Roth accounts can provide substantial benefits. More importantly, there’s a limited window of opportunity to make these conversions work in your favor.

In this guide, we’ll explore:

  1. Seven compelling reasons you might consider Roth conversions
  2. When these conversions make the most sense
  3. The critical timing window you need to understand.

Whether you’re just entering retirement or planning for the future, understanding these strategies can help you minimize your lifetime tax bill and maximize your retirement security.

What is a Roth conversion?

What is a Roth conversion? Simply put, it’s the process of moving assets from a pre-tax IRA or tax-deferred account, like a 401(k), to a Roth account. This transfer involves converting funds from accounts where you haven’t paid taxes yet into accounts where future growth and withdrawals can become tax-free.

How Does It Work?

When you convert to Roth, you’re essentially paying taxes today on the converted amount in exchange for tax-free growth and distributions in the future. For example, if you have $1 million in a traditional 401(k) and decide to convert the entire amount, you’ll pay income taxes on that full million dollars in the year you make the conversion.

Most people don’t convert everything at once because doing so would push them into the highest tax brackets. Instead, they might spread the conversion over several years. Using our million-dollar example, you might convert $100,000 annually over ten years, paying taxes on $100,000 each year rather than the full amount at once.

The essential question becomes: Does it make sense to pay these taxes now to potentially save on taxes later? The answer depends on several factors we’ll explore in the seven reasons below.

The Key Benefits of Roth Conversion for Your Retirement

Before diving into specific scenarios, it’s important to understand that Roth conversions offer several fundamental advantages. These benefits include

  • Eliminating future required minimum distributions
  • Creating tax diversification
  • Potentially leaving a more tax-efficient legacy for your beneficiaries.

However, these benefits come with a cost. You must pay taxes on the converted amount in the year of conversion. This means you’re paying taxes you wouldn’t otherwise owe until you reach the required minimum distribution age. The strategy only makes sense when the long-term benefits outweigh these immediate tax costs.

Reason #1: Convert to Roth to Reduce Future RMDs

The most compelling reason for many people to convert to a Roth is to reduce future required minimum distributions (RMDs). Once you reach age 73 or 75 (depending on your birth year), you must start taking distributions from your traditional retirement accounts, whether you need the money or not.

These RMDs can create what’s known as the “tax trap” of traditional retirement accounts. You’re forced to take these distributions, even if you have other income sources covering your needs, such as:

  • Social Security
  • Pensions
  • Taxable investment accounts

The problem compounds because RMDs increase each year as your life expectancy shortens.

Example

Consider a couple who have worked with me for nearly a decade. Both have pensions (one military, one teaching). Both are collecting Social Security and have enough guaranteed income to cover all their expenses. In fact, they were reinvesting excess income into their taxable accounts because they didn’t need it. When they reached RMD age, they suddenly had six figures of additional taxable income they had zero need for.

How RMDs Can Affect Your Retirement

Unwanted RMDs can affect you in several ways. They can

  • Push you into higher tax brackets
  • Trigger Medicare surcharges (IRMAA)
  • Make more of your Social Security taxable
  • Activate net investment income taxes on your other investments.

All of these consequences add unnecessary taxes to your retirement years.

By converting to Roth during your early retirement years, you can significantly reduce the size of your traditional accounts, thereby reducing future RMDs. Since Roth accounts have no RMDs during your lifetime, this strategy can help you maintain better control over your taxable income in later retirement.

Reason #2: Create Tax Diversification in Retirement

Having all your retirement savings in tax-deferred accounts creates a significant limitation. Every dollar you withdraw gets taxed as ordinary income. This lack of tax diversification can be problematic when you face unexpected expenses or opportunities.

Imagine you need a larger distribution for a new roof, unexpected medical expenses, or to help an adult child. If all your money is in traditional retirement accounts, you’ll pay income taxes on the entire withdrawal. Depending on your tax bracket, you might need to withdraw 20% or more to net the cash flow you need.

Tax diversification through Roth conversions gives you more flexibility. With money in Roth accounts, taxable brokerage accounts, and traditional retirement accounts, you can choose which “bucket” to draw from based on your current tax situation. This flexibility becomes especially valuable when managing your income to stay within certain tax brackets or avoid triggering other tax consequences.

For example, if you’re trying to keep your income low enough to qualify for Affordable Care Act premium tax credits before age 65, having tax-free Roth money available for large expenses can help you maintain those valuable subsidies.

Reason #3: Hedge Against Future Tax Increases

While no one can predict future tax policy with certainty, there are reasons to believe tax rates could increase over time. The country faces nearly $40 trillion in debt, an aging population, rising healthcare costs, and increasing interest on government borrowing.

The Tax Cuts and Jobs Act, which lowered Federal tax brackets, was recently made permanent through the One Big Beautiful Bill Act of 2025. However, future Congresses could still change tax policy, and the federal government’s financial challenges aren’t disappearing.

If you believe tax rates might be higher in the future, paying taxes today through Roth conversions could be advantageous. This strategy essentially locks in today’s tax rates on the converted amounts. Even if you’re not certain about future tax increases, having some assets in tax-free accounts provides a hedge against this uncertainty.

The key is not to convert everything based on fear of tax increases, but to consider this possibility as part of a balanced approach to tax diversification.

Reason #4: Protect Your Spouse from Higher Tax Rates

One of the most overlooked benefits of Roth conversions is protecting a surviving spouse from what’s often called the “surviving spouse tax penalty.” This issue affects married couples where one spouse is likely to outlive the other by several years.

When one spouse dies, the surviving spouse faces a significant tax challenge. They lose the benefit of married-filing-jointly tax brackets, which are roughly double those for single filers. However, they may still have the same retirement account balances generating RMDs, and their living expenses might not decrease proportionally.

Example

If a couple was taking $50,000 in RMDs while filing jointly, the surviving spouse might still need to take similar distributions but would now face the compressed single-filer tax brackets. This can push them into much higher marginal tax rates than they experienced as a married couple.

This situation is particularly relevant if there’s an age gap between spouses or if family health history suggests one spouse might outlive the other by many years. By converting some assets to Roth during the years when both spouses are alive and can file jointly, you can reduce the traditional account balances that will generate taxable RMDs for the surviving spouse.

Reason #5: Take Advantage of Market Downturns

Market volatility can create opportunities for more efficient Roth conversions. When your account values drop during market corrections or bear markets, you can convert the same number of shares for fewer tax dollars.

For instance, if you own 100 shares of a stock worth $10 per share ($1,000 total), but the price drops 10% to $9 per share, you can now convert those same 100 shares for only $900 in taxable income instead of $1,000. Or, you could convert more shares with the same Roth conversion amount.  If the investment recovers, those shares will grow tax-free in the Roth account.

This isn’t about trying to time the market perfectly, but rather taking advantage of opportunities when they present themselves. If you’re already considering Roth conversions and the market experiences a significant downturn, it might be an opportune time to execute your conversion strategy.

The key is to have a conversion plan in place so you can act when these opportunities arise, rather than making conversion decisions based solely on market movements.

Reason #6: Limited Charitable Giving Plans

If charitable giving isn’t a major priority in your retirement plans, this can support the case for Roth conversions. Here’s why: one of the most tax-efficient strategies for people with large traditional retirement accounts is using Qualified Charitable Distributions (QCDs) starting at age 70½.

QCDs allow you to give money directly from your traditional IRA to qualified charities, and these distributions count toward your RMD requirement without being taxable to you. For someone already giving $10,000 annually to charity, QCDs can effectively reduce their taxable RMD dollar-for-dollar.

However, if you’re not charitably inclined or don’t plan to make significant charitable contributions, you won’t benefit from this strategy. In this case, Roth conversions become more attractive because you won’t have the QCD option to help manage your future RMD tax burden.

This doesn’t mean you should convert to Roth just because you don’t give to charity, but it can be an additional factor supporting conversion if you’re already considering it for other reasons.

Reason #7: Make Your Legacy More Tax-Efficient

Perhaps the most compelling reason for Roth conversions is creating a more tax-efficient inheritance for your beneficiaries. This has become increasingly important since the passage of the SECURE Act in 2019, which eliminated the “stretch IRA” for most beneficiaries.

Under the old rules, if you left a traditional IRA to your adult children, they could take distributions over their own life expectancy, potentially stretching the tax deferral for decades. Now, most beneficiaries must empty inherited retirement accounts within 10 years, significantly accelerating the tax burden.

Consider leaving a $3 million traditional IRA to an adult child who’s a high earner—perhaps a physician, attorney, or business owner already in the top tax bracket. Under the 10-year rule, they’ll need to add roughly $300,000 to their taxable income each year to fully distribute the account. This could result in hundreds of thousands of dollars in additional taxes.

In contrast, if you leave that same $3 million in a Roth IRA, your beneficiary still faces the 10-year rule, but they can let the money grow tax-free for the entire 10 years and then withdraw it all tax-free in year 10. The tax arbitrage can be substantial, especially if your beneficiaries are in their peak earning years when they inherit.

This strategy does require some educated guessing about your beneficiaries’ future tax situations, but if you expect them to be high earners when they inherit, the case for Roth conversions becomes very compelling.

When Should You Convert an IRA to Roth: The Conversion Window

Understanding when to convert an IRA to a Roth is crucial for maximizing the strategy’s benefits. The optimal time for most people is during the “Roth conversion window”—the period between retirement and the start of RMDs.

This window typically starts when you fully retire (or when the higher-earning spouse retires) and your employment income drops to zero or near zero. It ends when you reach RMD age, which is 73 or 75 for most people, depending on your birth year.

For someone who retires at 60 with an RMD age of 75, this creates a 15-year conversion window. During these years, your income might consist only of investment dividends, interest, and capital gains distributions—potentially putting you in much lower tax brackets than during your working years.

However, the conversion window has different phases with varying considerations:

Ages 60-65 (Pre-Medicare)

During this period, you’ll likely need health insurance from the healthcare exchanges, and you might qualify for valuable premium tax credits under the Affordable Care Act. Large Roth conversions could reduce or eliminate these credits, so conversions need to be carefully planned during this phase.

Ages 65-75 (Post-Medicare, Pre-RMD)

This is often the sweet spot for Roth conversions. You’re on Medicare, so you don’t have to worry about losing ACA premium credits. While large conversions might trigger Medicare surcharges (IRMAA), these costs are typically much less than the potential savings from reduced future RMDs.

The key is to use this window strategically. You might convert enough each year to “fill up” lower tax brackets—perhaps converting enough to reach the top of the 12% or 22% bracket, depending on your situation.

Understanding the Rules for Converting to a Roth IRA

The rules for converting to a Roth IRA are relatively straightforward, but there are important details to understand. Unlike Roth IRA contributions, there are no income limits on conversions—anyone can convert traditional retirement account funds to a Roth IRA, regardless of income level.

The converted amount is added to your taxable income for the year, so timing and amount are crucial considerations. You’ll want to work with your tax professional to understand how the conversion will affect your overall tax situation, including potential impacts on Medicare premiums, Social Security taxation, and other income-based benefits.

One important rule: if you have multiple traditional IRAs with different tax characteristics (some with deductible contributions, some with non-deductible contributions), the IRS requires you to convert proportionally from each account. This is known as the “pro-rata rule” and can complicate conversion strategies for some people.

How to Convert to a Roth IRA: Implementation Considerations

When you’re ready to move forward with how to convert to a Roth IRA, you’ll typically work with your financial institution to execute the conversion. This can often be done as a direct transfer between accounts, avoiding any risk of penalties or missed deadlines.

The most important consideration is having a plan for paying the taxes on the conversion. Ideally, you’ll pay these taxes from sources outside your retirement accounts to maximize the benefit of the conversion. Using retirement account funds to pay conversion taxes reduces the amount that can grow tax-free in the Roth account.

Many people use taxable investment accounts or cash savings to pay conversion taxes, viewing it as an investment in future tax savings. This is where working with a qualified financial planner becomes valuable—they can help you model different conversion scenarios and determine the optimal strategy for your specific situation.

Should I Convert My IRA to a Roth? Making the Decision

This question doesn’t have a one-size-fits-all answer. The decision depends on

  • Your current tax situation
  • Expected future tax rates
  • Retirement income needs
  • Legacy goals
  • The specific timing of your retirement

The strategy works best for people who expect to be in similar or higher tax brackets in retirement, have other sources of funds to pay conversion taxes, and have a long enough time horizon for the tax-free growth to offset the upfront tax cost.

It’s also important to remember that Roth conversions are about reducing uncertainty, not eliminating it. You can’t know with certainty what future tax rates will be or exactly what your retirement will look like. But by creating tax diversification through strategic conversions, you give yourself more options and flexibility in retirement.

The Bottom Line on Roth Conversions

Roth conversions can be a powerful tool for the right person in the right situation, but they’re not appropriate for everyone. The seven reasons outlined here provide a framework for evaluating whether conversions make sense for you.

  1. Reducing RMDs
  2. Creating tax diversification
  3. Hedging against tax increases
  4. Protecting a surviving spouse
  5. Taking advantage of market downturns
  6. Limited charitable plans
  7. Creating tax-efficient legacies

The decision to convert requires careful planning and coordination with your overall retirement plan. Consider working with a qualified financial planner who can model different scenarios and determine the optimal approach for your specific situation. The goal isn’t just to minimize taxes, but to create a retirement plan that maximizes your financial security and peace of mind.

At Imagine Financial Security, we help individuals over 50 with at least $1 million saved navigate complex retirement decisions. If you are looking to

  • Maximize your retirement spending
  • Minimize your lifetime tax bill
  • Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel. This is for general education purposes only and should not be considered as tax, legal, or investment advice.

Trump Accounts: A Complete Guide to Retirement Savings for Children

We’re approaching a significant milestone in the history of financial planning. July 4th, 2026, marks the one-year anniversary of the One Big Beautiful Bill Act. This presents a unique planning opportunity that many families are just beginning to understand: Trump Accounts.

If you’re a parent or grandparent thinking about your children’s financial future, or if you’ve reached a point where you want to practice legacy planning with a “warm hand” instead of waiting until you’re gone, Trump Accounts offer an entirely new approach to retirement savings for minors.

The timing couldn’t be more relevant. Many families who have achieved financial independence are now looking beyond their own retirement security toward setting up the next generation for success. Trump Accounts offer something that hasn’t existed before. A way to start retirement savings for children without the traditional barriers that have limited options in the past.

What Are Trump Accounts and How Do They Work?

Trump Accounts are a result of the One Big Beautiful Bill Act signed into law on July 4th, 2025. While the full economic impact of this legislation is still unfolding amid ongoing global conflicts that are affecting oil prices and inflation, the tax benefits have already begun helping many families. Think of Trump Accounts as traditional IRAs specifically designed for minor children. But they come with some important differences that make them accessible in ways that traditional retirement accounts are not.

The fundamental concept is straightforward. Trump Accounts allow you to make tax-deferred investments on behalf of children under 18, regardless of whether they have earned income. This removes the biggest barrier that has historically prevented families from starting retirement savings for children early. Traditional and Roth IRAs require earned income, so most young children can’t participate. Trump Accounts change that equation entirely.

The money you contribute grows tax-deferred, similar to a traditional IRA, but with some unique features. Individual/family contributions are made with after-tax dollars, similar to non-deductible IRA contributions. The account remains under custodial management until the beneficiary reaches 18 years old. At that point it converts to a traditional IRA in their name.

Setting Up Child Retirement Accounts: Rules and Requirements

Understanding the rules for Trump Accounts is essential before you decide whether they fit into your family’s financial strategy. The beneficiary must be under 18 years old and have a valid Social Security number. Only parents or legal guardians can open and manage these accounts as custodians. Grandparents, family members, and friends can contribute to existing accounts.

One important limitation: there can only be one Trump account per beneficiary. Unlike 529 plans, which allow multiple accounts for the same child, Trump Accounts follow a one-per-person rule. This means coordination becomes important if multiple family members want to contribute.

The contribution structure offers some interesting opportunities. The total annual contribution limit for 2026 is $5,000 per beneficiary. However, there’s an additional opportunity through employer contributions. If you’re a business owner or your employer participates in the program, up to $2,500 can be contributed on behalf of an employee’s Trump Account. That contribution counts toward the $5,000 total limit. This means you could potentially contribute $2,500 that is tax-deductible for the business, plus another $2,500 from personal after-tax income.

Several major companies have already committed to offering Trump account contributions as employee benefits. There are roughly 60 companies that have pledged to make contributions on behalf of their employees or employees’ beneficiaries. These include:

  • Bank of America
  • BNY Mellon
  • Schwab
  • BlackRock
  • Chase
  • Wells Fargo
  • Broadcom
  • Coinbase
  • IBM
  • Dell
  • NVIDIA

There’s also a special “pilot contribution” opportunity. The U.S. Treasury Department will provide $1,000 in seed funding for Trump Accounts opened for children born between 2025 and 2028. This free money doesn’t count against your $5,000 annual contribution limit, making it an attractive starting point for eligible families.

Investment Options for Trump Investment Accounts

The investment choices for Trump investment accounts are deliberately simple and conservative. You won’t find cryptocurrency options, individual stocks, or complex investment vehicles. Instead, Trump investment accounts are restricted to broad-based index funds and ETFs that focus primarily or exclusively on U.S. equities. While this might seem limiting, it actually aligns well with long-term wealth-building strategies.  Think of time in the market as opposed to timing the market.

For most families just getting started with long-term investing, sophisticated investment options aren’t necessary. The power of Trump Accounts lies in time and compounding, not complex investment strategies. Having decades for money to grow in broad market index funds has historically been one of the most reliable wealth-building approaches available.

BNY Mellon will initially manage the accounts through its infrastructure, while Robinhood will handle account custody. While you won’t be able to open Trump Accounts directly through traditional brokerages like Schwab or Fidelity initially, these options will likely become available as the program matures and compliance requirements are established.

Understanding Liquidity and Long-Term Implications

One of the most important aspects of Trump Accounts is understanding when and how funds become accessible. There is no liquidity until the beneficiary reaches 18 years old (or 21 in some states, depending on the age of majority). This is a significant consideration that differentiates Trump Accounts from other savings options.

Once the beneficiary reaches the age of majority, the Trump account automatically converts to a traditional IRA in their name. At this point, traditional IRA rules apply. This includes the 10% early withdrawal penalty for distributions before age 59½, as well as ordinary income taxes on any growth. The original after-tax contributions can be withdrawn without additional taxes, but tracking this basis becomes crucial for tax purposes.

There are some exceptions to the early withdrawal penalties, similar to traditional IRAs. Qualified education expenses, first-time home purchases, and certain hardship situations, such as disability or unemployment, may allow penalty-free withdrawals. However, ordinary income taxes would still apply to the growth portion.

One unique feature is the option to roll Trump account funds into an ABLE account when the beneficiary turns 17, if the child has a qualifying disability. ABLE accounts allow individuals with disabilities to save money without affecting their eligibility for federal benefits like Supplemental Security Income. This option provides important protection for families dealing with special needs planning.

Trump Accounts vs Other Retirement Savings for Children Options

When you evaluate retirement savings strategies for children, you need to consider Trump Accounts alongside other established options. The most popular alternative is the 529 education savings plan, which offers some significant advantages that Trump Accounts cannot match.

529 plans provide state income tax deductions in many states, something Trump Accounts do not offer. The money grows tax-free, and when used for qualified education expenses, distributions are completely tax-free. Recent changes have expanded 529 flexibility, allowing up to $20,000 annually for K-12 private school expenses and enabling 529-to-Roth IRA rollovers under specific conditions.

The 529-to-Roth IRA rollover option is particularly powerful. After a 529 account has remained open for 15 years, you can roll up to $35,000 into a Roth IRA for the beneficiary over time, subject to annual IRA contribution limits. This provides a tax-free path to retirement savings that Trump Accounts cannot match, since conversions from Trump Accounts to Roth IRAs would be taxable events.

Custodial brokerage accounts (UTMA/UGMA accounts) offer another alternative with complete investment flexibility and no contribution limits beyond annual gift tax thresholds. These accounts don’t provide tax-deferred growth. They offer capital gains tax treatment rather than ordinary income tax treatment, and can be used for any purpose without penalties. The trade-off is that the child gains full control at 18 or 21, which may or may not align with your comfort level.

For families with children who have earned income, Roth IRAs remain an excellent option. A working teenager can contribute to a Roth IRA and potentially receive decades of tax-free growth. The combination of a Roth IRA for earned income plus a Trump account for additional savings could provide a powerful one-two punch for families with the resources to fund both.

Comparing Retirement Savings for Children Strategies: A Prioritization Framework

When deciding how to prioritize different retirement savings options for children, consider your family’s specific goals and circumstances. If education funding is a primary concern, 529 plans should typically be the first option. The tax advantages, flexibility for K-12 expenses, and the 529-to-Roth IRA rollover option make them superior for most families focused on education costs.  Additionally, you can transfer an unused 529 to that adult child, who can ultimately use it for a future child’s education expenses. 

For families who have already addressed education funding or have additional resources, custodial brokerage accounts often offer more flexibility than Trump Accounts. The ability to use funds for any purpose without penalties, combined with more favorable capital gains tax treatment, makes custodial accounts attractive for families comfortable with transferring control to their children at the age of majority. 

Trump Accounts might make the most sense as a third-tier option, particularly for families with children born between 2025 and 2028 who can take advantage of the $1,000 pilot funding. The accounts also become more attractive if your employer offers contribution matching or if you’re a business owner who can take advantage of the tax-deductible employer contribution option.

One alternative approach that deserves consideration is to overfund your own taxable brokerage account for the purpose of using it for lifetime gifting and legacy purposes. This strategy maintains your control over the assets while providing flexibility to make gifts when your children or grandchildren actually need financial support, whether for

  • Education
  • Home purchases
  • Business ventures
  • Other life goals 

When you pass away, those assets can receive a step-up in cost basis, making it one of the most powerful legacy buckets available. 

Tax Considerations and the Kiddie Tax Impact

Understanding the tax implications of Trump Accounts requires familiarity with “kiddie tax” rules, which can significantly impact the effectiveness of certain strategies. The kiddie tax applies to the unearned income of children under 18 (or to full-time students under 24 who don’t provide more than half of their own support).

For 2026, the first $1,350 of unearned income is tax-free. The next $1,350 is taxed at the child’s rate (likely very low). Any unearned income above $2,700 is taxed at the parents’ marginal tax rate. This becomes particularly relevant when considering Roth conversion strategies once Trump Accounts convert to traditional IRAs.

Many online discussions suggest that converting funds from a Trump account into Roth IRAs after age 18 represents a significant planning opportunity. However, the kiddie tax rules can make this strategy less attractive than it initially appears. If the beneficiary still qualifies as a dependent on their parents’ tax return, the parents’ higher marginal tax rates could apply to large Roth conversions instead of the child’s lower rates.

More effective conversion opportunities may arise after the child graduates from college and begins working independently. They will not be subject to kiddie tax rules and can take advantage of their own lower tax brackets. However, at that point, the decision belongs to the child, not the parents who originally funded the account. 

Are Trump Accounts Right for Your Family?

Trump Accounts represent a new tool in the family financial planning toolkit. Still, they’re not necessarily the best tool for every situation. They work best for families who have already addressed their primary financial goals:

  • Retirement security
  • Education funding for their children
  • Other immediate financial priorities

The accounts make the most sense when viewed as part of a comprehensive approach to lifetime legacy planning rather than as a standalone solution.

If you’re in a position where you’ve achieved financial independence and are looking for additional ways to benefit your children or grandchildren, Trump Accounts can play a role, particularly if you can take advantage of the pilot funding or employer contribution opportunities.

However, liquidity restrictions, ordinary-income tax treatment, and limited investment options make Trump Accounts less flexible than alternatives such as 529 plans or custodial brokerage accounts. The conversion to a traditional IRA at age 18 does provide some planning opportunities. These need to be weighed against the immediate benefits available through other savings vehicles.

For most families, a prioritized approach makes sense:

  • 529 plans for education funding
  • Roth IRAs for children with earned income
  • Consideration of Trump Accounts or
  • Custodial brokerage accounts for additional savings goals

The key is to understand how each option fits into your overall family financial strategy, rather than viewing any single account type as a complete solution.

The introduction of Trump Accounts adds another option to consider. Still, the fundamentals of long-term wealth building remain the same:

  1. Start early
  2. Invest consistently
  3. Give time and compounding the opportunity to work

Whether you choose Trump Accounts, 529 plans, custodial accounts, or a combination of strategies, the most important step is starting with a plan that matches your family’s goals and comfort level.

Need More Guidance?

At Imagine Financial Security, we help individuals over 50 who have at least $1 million saved navigate these complex retirement decisions. If you are looking to

  • Maximize your retirement spending
  • Minimize your lifetime tax bill
  • Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel. This is for general education purposes only and should not be considered as tax, legal, or investment advice.

TIAA Traditional Withdrawal Options: Your Complete Guide to Four Payout Choices

If you have money in TIAA Traditional, you’ve probably wondered what your options are when it’s time to take your money out for retirement. Understanding your TIAA Traditional withdrawal options is one of the most important decisions you’ll make in your retirement planning journey. Yet, it’s also one of the most confusing aspects of TIAA retirement accounts.

What is TIAA Traditional?

It’s a fixed annuity that’s part of your 403(b) retirement account, specifically designed for employees of:

  • Non-profit organizations
  • Hospitals
  • Universities
  • Schools

Unlike variable investments that fluctuate with market performance, your TIAA traditional annuity provides stability through guaranteed minimum interest rates and participation in TIAA’s carefully managed general account.

Retirement planning decisions involving TIAA Traditional are particularly complex because it’s a unique product with specific rules and options. While this guide covers the four main payout choices available, it’s important to consider how these options align with your overall financial picture, including:

  • Other income sources
  • Other investments
  • Retirement timing
  • Risk tolerance
  • Legacy goals.

Understanding Your TIAA Traditional Options

TIAA Traditional is different from the variable annuity options in your 403(b) account, such as CREF stock, CREF growth, or CREF bond. While those investments tie your returns to market performance, TIAA Traditional provides returns based on TIAA’s general account performance. This massive, conservatively managed portfolio includes traditional bonds, commercial real estate, agriculture, timber, and other stable investments that TIAA has been managing for over 150 years.

There are several types of TIAA traditional contracts, and each has different rules and interest rates. You might have older contracts from contributions made decades ago, or newer contracts from recent contributions. Some contracts are fully liquid (marked with an “S” for supplemental), while others have liquidity restrictions. Furthermore, there are even certain “Plan Rules” within your organization that might create additional complexity around the availability and liquidity of funds.  Understanding which type of contract you have and your plan’s rules is crucial for determining your available options.

Option 1: Required Minimum Distribution (RMD) or Minimum Distribution Option (MDO)

The first way to access your TIAA traditional funds is through the required minimum distribution option, also called the minimum distribution option by TIAA. This option becomes available when you reach the age when the IRS requires you to start taking distributions from your tax-deferred retirement accounts.  If you miss an RMD, you could be subject to a 25% penalty! 

The RMD age has changed over the years due to legislation. Previously set at 70.5, it was raised to 72 by the SECURE Act. RMD now stands at 73 or 75, depending on your birth year. If you were born in 1960 or later, your required minimum distribution age is 75.

How the Math Works

The IRS provides a life expectancy table that determines your distribution factor based on your age. For example, if you turn 75 in 2025, your life expectancy factor is 24.6. You divide your account balance by this factor to determine your required distribution amount.

Example

Let’s say you have $1 million in a TIAA traditional account. At age 75, you would divide $1 million by 24.6, resulting in a required distribution of approximately $40,650, or about 4% of your account balance. As you age, your life expectancy decreases, which means your required distributions increase. By age 90, with a life expectancy factor of 12.2, that same $1 million would require a distribution of nearly $82,000.

This creates what I like to call the “Tax Trap of 401ks and IRAs.” If you have substantial Social Security payments and perhaps a pension, and you don’t need these tax-deferred assets for current income, those increasing RMDs can push you into higher tax brackets and trigger additional costs like Medicare surcharges or IRMAA.

The advantage of this option is continued tax deferral while pulling out the minimum required by the IRS. Before reaching RMD age, you can let your account continue growing tax-deferred without being forced into any payout structure. You can also change to other options later if your needs evolve.

Option 2: Interest-Only Withdrawals

The second option allows you to withdraw only the interest your TIAA traditional account earns while leaving your principal intact. Each of your TIAA traditional accounts has an associated interest rate that depends on when you made the contributions and what type of contract you have.

Contributions made in the 1970s, 1980s, and 1990s typically carry much higher interest rates than contributions made after 2009, when interest rates dropped to near zero following the Great Recession. However, even recent TIAA traditional contributions often provide interest rates of 4% to 4.5% or higher, which compare favorably to traditional bond investments that have averaged less than 2% annually over the past 10-15 years.

The interest rates also vary by contract type. Contracts without an “S” designation (such as RA and GRA contracts) typically offer higher interest rates but come with liquidity restrictions. These are usually funded by employer contributions. Contracts with an “S” designation (SRA and GSRA contracts) are supplemental contracts funded primarily by your own contributions. They offer slightly lower interest rates but provide full liquidity.

Example

Using our $1 million example with a combined interest rate of 4.5%, your account would generate approximately $45,000 in annual interest. With the interest-only option, you could receive this $45,000 as income while preserving your $1 million principal balance. You can typically choose to receive these payments monthly, quarterly, semi-annually, or annually, depending on your cash flow needs.

This option works well if you need supplemental income but want to preserve your principal for future needs or to leave as a legacy. The interest payments from pre-tax 403b accounts are treated as taxable income in the year you receive them, just like any other distribution from a tax-deferred account. However, there are usually restrictions on how frequently you can start and stop these payments. You’ll want to confirm the specific rules for your contracts.

Option 3: Annuitization – Creating a Lifetime Income Stream

The third option, and what many experts consider the most underutilized, is annuitization. This means exchanging your account balance for a guaranteed income payment that will continue for as long as you live, or for as long as you and your spouse live if you choose a joint option.

When you annuitize your TIAA traditional account, you’re essentially trading your account balance for an income stream you can never outlive. The amount of income depends on several factors:

  • Your age
  • Your account balance
  • The interest rates of your various contracts
  • The payout option you select

Real Example

A 67-year-old client with various TIAA traditional contracts dating back decades received an illustration showing a single life payout rate of 8.81% with a 10-year guarantee period. This means that for every $100,000 annuitized, this client would receive $8,810 annually for life.

The 10-year guarantee provides protection if you die early in retirement. If you pass away within 10 years of starting the annuity, payments continue to your beneficiary for the remainder of the guarantee period. So, if you die after five years, your beneficiary receives payments for five more years.  But if you outlive the 10-year guarantee period, there is no death benefit.

You can also choose joint life options that continue payments as long as either you or your spouse is alive. These typically offer lower payout rates because they’re expected to pay out longer, but they provide valuable protection for surviving spouses.

Payout rates vary significantly depending on when you made your contributions. Older contracts often have much higher payout rates. I’ve seen TIAA Traditional payout rates as high as 10% per year on older contracts from the 80s and 90s. 

TIAA’s long history and conservative management approach allows them to offer competitive rates to existing participants.

It’s important to understand that annuitization is an irrevocable decision. Once you exchange your account balance for the income stream, you cannot change your mind or access the principal. Additionally, these annuities are generally designed to be fixed with no guarantee of increased payments over time. 

This brings inflation risk into play more so than other investments.  However, the high baseline guaranteed income can stack on top of Social Security and allow for your more aggressive investments to compound longer.  Many are surprised that this can result in a higher legacy amount despite the lack of a death benefit.

Option 4: Transfer, Rollover, or Liquidation

The fourth option is to move your money out of TIAA Traditional entirely. Your ability to do this depends on what type of contracts you have.

If your TIAA traditional is in supplemental contracts (SRA, GSRA, and RCP), you have full liquidity. You can

  • Take the money out as a lump sum
  • Roll it into your own IRA
  • Transfer it to other investments within your 403(b) plan without restrictions.

However, if your money is in non-supplemental contracts (RA, GRA, or RC), you face liquidity restrictions because these contracts were funded primarily by employer contributions. For these illiquid contracts, you can use what’s called a Transfer Payout Annuity (TPA). A TPA provides your money in equal installments for a term determined by the type of contract.

  • RA Contracts: 10 payments over nine years
  • RC Contracts: 7 payments over 6 years
  • GRA Contracts: 5 payments over 4 years

If you elect to receive these payments as cash, each payment is taxable income. If you roll the TPA payments to an IRA or other qualified account, there are no immediate tax consequences.  You’ll need to check with TIAA to understand the specific rules for your contracts.

Many people choose this option because they’re frustrated with TIAA Traditional’s complexity or because they want to consolidate and simplify their retirement accounts. However, this decision deserves careful consideration because you’re giving up some unique benefits that are difficult to replicate elsewhere.

The Most Overlooked Option: Why Annuitization Deserves Serious Consideration

After working with hundreds of TIAA participants over the years, one pattern became clear.

Most people immediately gravitate toward option four (getting their money out) without seriously considering annuitization. This happens for several understandable reasons.

First, annuities have developed a negative reputation in the financial industry. Much of this stems from how annuities are often sold in the marketplace. Some salespeople are taking advantage of seniors and retirees, focusing on their own commissions rather than clients’ needs. This has created widespread distrust of anything labeled as an “annuity.”

Second, TIAA Traditional is genuinely complex, and many people simply want to move their money to something they understand better. The various contract types, liquidity restrictions, and payout options can feel overwhelming.

However, this rush to liquidate often overlooks the significant value that TIAA Traditional can provide in a well-designed retirement plan. Consider these advantages:

Bond Alternative

Over the past 10-15 years, traditional bonds have provided returns of less than 2% annually while experiencing significant volatility. TIAA traditional accounts typically earn 4% to 4.5% or more annually and never decrease in value. They can serve as an excellent bond alternative, allowing you to be more aggressive with your other investments.

Guaranteed Income Foundation

The annuitization option provides a guaranteed income foundation that reduces pressure on your other investments. With a baseline income from Social Security and a TIAA traditional annuity, you can afford to take more risk with your remaining investments to capture potential upside.

Superior Payout Rates

The payout rates available through TIAA traditional annuitization often exceed what you can obtain by purchasing commercial annuities in today’s market. The 8.81% payout rate in our example would be very difficult to replicate elsewhere.

Longevity Insurance

If you expect longevity for you or your spouse, the annuity continues paying regardless of how long you live. TIAA reportedly has clients in their hundreds who are still receiving payments.

The key is not to annuitize everything, but to consider using TIAA Traditional as one component of a diversified retirement income strategy. You might annuitize a portion of your TIAA Traditional to create a guaranteed income floor, while keeping other assets liquid for emergencies and growth potential.

Making the Right Choice for Your Situation

Choosing among these four options requires careful consideration of your complete financial picture. Here are some key factors to evaluate:

Income Needs

How much income will you need from your retirement accounts? If you have substantial Social Security and pension income, you might prefer to let the TIAA traditional continue growing tax-deferred. If you need current income, the interest-only or annuitization options might be more appropriate.

Other Assets

What other liquid assets do you have available for emergencies? If most of your wealth is in retirement accounts, maintaining some liquidity is important. But if you have substantial taxable investments or other liquid assets, you might be more comfortable annuitizing a portion of your TIAA Traditional.

Risk Tolerance

How comfortable are you with market volatility in your other investments? If TIAA Traditional serves as your bond allocation, you might be able to invest more aggressively elsewhere.

Legacy Goals

Do you want to leave assets to heirs? Annuitization reduces the assets available for inheritance, whereas the other options preserve more of the principal.  With that said, if you do live a long time, the benefits of annuitization could allow for your growth assets to compound without selling at the wrong time.

Tax Considerations

How will each option affect your overall tax situation? Large RMDs might push you into higher tax brackets, while annuity payments provide predictable taxable income.

Health and Longevity

Your health status and family history of longevity should influence your decision. If you expect a long retirement, annuitization becomes more attractive.

Conclusion

Your TIAA traditional account represents a valuable and unique retirement asset that deserves careful consideration. While the complexity can be frustrating, understanding your four main options – RMD/MDO, interest-only, annuitization, and rollover/liquidation – helps you make an informed decision that aligns with your retirement goals.

The most important takeaway is not to rush into liquidating your TIAA traditional simply because it’s complex. The guaranteed annuity rate and lifetime income options available through TIAA Traditional are increasingly rare in today’s financial marketplace. These benefits, combined with TIAA’s 150+ years of experience and conservative management approach, make TIAA Traditional a potentially valuable component of your retirement income strategy.

Before making any decisions, consider how each option fits within your overall financial plan. Think about your income needs, risk tolerance, legacy goals, and tax situation. If you’re unsure, consider working with a fee-only financial planner who can provide objective guidance without trying to sell you additional products.

Remember, you don’t have to choose just one option or make all decisions at once. You might use different options for different portions of your TIAA Traditional balance, or adjust your approach as your needs evolve in retirement. The key is understanding your choices so you can make decisions that support your long-term financial security and retirement goals.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to

  • Maximize your retirement spending
  • Minimize your lifetime tax bill
  • Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal, or investment advice.

Should You Annuitize in Retirement?  4 Surprising Truths About Annuities

Let me start with complete transparency: I don’t sell annuities, I don’t receive commissions from them, and frankly, I dislike most annuity products on the market. They’re often complicated, expensive, and in many cases, they’re sold rather than planned.

My skepticism runs deep. Nearly 18 years ago, in my first financial role out of college, there was a veteran in my office who had one solution for everything: annuities. Client had an IRA rollover? Annuity. Extra money beyond their 401 (k)? Annuity. Worried about market volatility? You guessed it – annuity. This approach made me sick and shaped my career trajectory as a fee-only planner.

But this isn’t about bashing annuities like Ken Fisher does. When used correctly – specifically when used the way they were designed to be used – annuities can create outcomes that surprise even sophisticated investors and retirees. After 17-18 years of retirement planning, I’ve learned that bringing bias to the table and simply saying “annuities are bad” isn’t helpful.

Today, I want to walk you through four surprising benefits of annuitizing a portion of your fixed income and how this fits into well-designed retirement income planning.

The big takeaway? Retirement planning isn’t just about growing assets anymore – it’s about turning those assets into reliable, efficient, and sustainable income.

1. Lower Stress During Market Volatility: The Emotional Game-Changer

Here’s something most people don’t understand until they experience it firsthand: having an annuitized portion of your portfolio dramatically reduces stress during market downturns in retirement.

Consider this reality: if you retire at 60 and plan to live until 90, that’s a 30-year time horizon. Historically, there’s a 20% market downturn or bear market approximately once every five years. This means you could experience five or even six major bear markets during your retirement.

Bear markets hit differently when you’re retired.

When you’re accumulating wealth, you might even feel somewhat positive about a bear market – subconsciously, you know you’re buying shares at discounted prices. It’s uncomfortable, but manageable. When you’re withdrawing money for living expenses, volatility can feel nauseating.

I’ve been working with retirees for 18 years. In that time, I’ve witnessed very sophisticated retirees panic during downturns by bailing out of well-thought-out, diversified strategies right in the middle of a bear market. I’ve watched vacations get ruined, and couples argue over whether they should cut spending during market downturns.

But here’s what I’ve never seen:

I’ve never had a client with guaranteed lifetime income layered on top of other income sources – whether Social Security or a pension – say they regret securing that income stream. It’s always the opposite.

During COVID in 2020, during the 2022 downturn, and going back to 2008, when markets dropped 20% or more, clients with annuitized income consistently told me: “I’m so glad I have that guaranteed income check showing up every month.”

That predictability changes behavior, and in retirement, behavior matters infinitely more than spreadsheets.

Yes, you can hold bonds or cash for safety, but 2022 reminded us that bonds can fall double digits, and cash loses purchasing power over time. Your safe money isn’t about maximizing returns – it’s about minimizing emotional risk. And emotional risk in retirement is incredibly expensive.

2. Reduced Withdrawal Pressure: The Mathematical Advantage

This is where the math really shines, and it’s one of my favorite impacts of annuitization.

Most retirees follow traditional withdrawal frameworks. Let’s use the 4% rule as an example. Say you have $2 million invested and need $80,000 annually – that’s exactly 4%, which should theoretically work fine.

Now let’s see what happens with partial annuitization:

Instead of relying solely on systematic withdrawals, let’s say you annuitize $500,000 of your fixed income allocation. Using a conservative 7% payout rate (and I’ll explain why this is conservative in a moment), that $500,000 generates $35,000 annually in guaranteed income.

Your remaining portfolio balance is now $1.5 million, but it only needs to produce $45,000 because you’re receiving $35,000 from the lifetime income stream. Divide $45,000 by $1.5 million, and you get an effective 3% withdrawal rate on the remaining portfolio.  That reduced withdrawal rate on the invested balance could allow for better long-term growth, all because you maximized the cash flows from your ‘safe bucket.’ 

That difference matters enormously over the long term.

Why can annuities offer higher payout rates than bonds? Two reasons: mortality credits and longevity pooling. You’re not just earning bond-like returns – you’re benefiting from pooled longevity risk. Some people in the pool won’t live very long; others will live much longer. This pooling effect creates higher payout rates than you could achieve with individual bonds or CDs.

I broke down Marilyn’s real case study on YouTube: She was earning approximately 8.6% on her TIAA traditional annuity – well above the conservative 7% I used in the example above.

Surprisingly, partial annuitization increased the ending ‘legacy’ to her two adult children!  Despite dropping her liquidity after annuitizing that portion of her assets.

This higher payout rate reduces strain on your equity portfolio, which means:

  • Lower sequence of returns risk
  • Fewer forced sales during market downturns
  • More compounding potential for long-term growth

Annuities don’t just create income – they reduce selling pressure on everything else. This structural shift is often misunderstood but incredibly powerful.

The timing of this strategy matters significantly. We’ve had three consecutive years of bull market returns – double digits in the 20% range for two years, then 16% last year. But who knows how much longer this will continue?

We had about 11-12 years between 2008 and 2020 with minimal bear markets, but then just a two-year gap before the 2022 downturn. Markets are cyclical, and short-term, they’re driven by emotion and irrationality.

The question is:

  1. What’s your plan for the next bear market?
  2. Can partial annuitization help you navigate it emotionally while avoiding the need to sell riskier assets with better long-term growth potential?

3. Higher Legacy Potential: The Counterintuitive Truth

This surprises people more than anything else, and honestly, it shocked me initially, too. I spent considerable time manipulating financial planning software because I didn’t believe the results. But the math is sound and makes perfect sense once you understand it.

Annuitizing a portion of your assets can actually result in higher legacy amounts, not lower ones.

This shocks people because the common assumption is: “If I annuitize, my kids lose out because that money isn’t liquid anymore.” While liquidity does disappear with annuitization, if longevity plays out in your favor – which is the entire purpose of annuitization – the results can be dramatically different.

Here’s why: If you plan to live into your 80s or 90s, the annuity keeps paying throughout that entire period. Meanwhile, because you’ve reduced withdrawal pressure on your equity portfolio, those riskier assets with higher long-term growth potential can compound more efficiently.

In stress tests I’ve run with real case studies, including Marilyn’s situation, the numbers consistently support this outcome. For Marilyn, the breakeven point was approximately 81 years old. Beyond that point, the legacy outcome was significantly higher with partial annuitization than without it.

Legacy’s biggest threat

The biggest threat to legacy isn’t annuitization – it’s poor returns early in retirement. Poor sequence of returns risk combined with higher withdrawals damages portfolios far more than partial annuitization ever could.

If you retire into a bear market, the value of reduced withdrawal strain becomes even more powerful. I’ve seen this play out with clients who annuitized portions of their portfolios 10-15 years ago. They’ve been able to take full advantage of the bull run we’ve enjoyed since 2008, with their remaining investments growing much more efficiently because they weren’t forced to sell during downturns.

4. True Longevity Insurance: Beyond Social Security and Bonds

Most retirees over-allocate to bonds because they fear volatility. But bonds don’t solve longevity risk – they just reduce volatility temporarily.

If you live 25 or 30 years in retirement, how long will that safe bond allocation actually last?

Longevity risk is particularly real for people who take care of themselves, have good genetics, and access to excellent healthcare. As modern medicine continues to evolve and AI advances rapidly, life expectancies may increase significantly. Even if the most optimistic predictions don’t materialize, many people will still live well into their 90s or beyond.

Social Security provides powerful longevity insurance, but for many high-income retirees, it won’t cover enough expenses. This is where partial annuitization becomes valuable – it can convert part of that underutilized fixed income allocation into maximized income streams that protect against longevity risk.

The annuity will pay whether you live to 85 or 105.

I see the bond or fixed income bucket consistently underutilized by retirees. People are often afraid to commit large lump sums to annuities because liquidity disappears. This is exactly why having a comprehensive plan and strategy is crucial – this isn’t an all-or-nothing decision.

Liquidity matters. Health matters. Legacy goals matter. Interest rates, payout rates, specific annuity contracts, and terms all matter significantly.

This isn’t about annuitizing everything – it’s about intelligently designing the fixed income sleeve of your portfolio, building an income floor, creating emotional stability, and giving growth assets room to compound. That’s true retirement income planning.

Four Critical Questions to Ask Yourself

If you’re approaching retirement or recently retired and wondering whether partial annuitization makes sense, consider these four questions:

1. What is my true risk tolerance in retirement?

Really internalize this. How do you actually feel about risk – not today while you’re still working, but when you’re actually retired and watching your portfolio fluctuate? If you are retired, how do you feel when the market drops 10%, 20%, or even 30%?

2. Do I expect longevity in my family?

Consider both yourself and your spouse. Do you have good genetics, take care of your health, and have access to quality healthcare? Are you planning for the possibility of living 25, 30, or more years in retirement?

3. What percentage of my expenses are covered by guaranteed income sources?

If Social Security only covers 25% of your total expenses, that’s not substantial coverage. You could be much more subject to the sequence of returns risk than someone with higher guaranteed income coverage.

4. Am I reacting emotionally to the word “annuity,” or am I evaluating strategically?

Are you considering annuities as part of an overall retirement income plan, or are you dismissing them based on preconceived notions?

If your income stability ratio is low – meaning most expenses must come from portfolio withdrawals – you’re much more exposed to sequence risk. This doesn’t automatically mean you need annuities, but it absolutely means you should evaluate them objectively.

This is especially true if you have access to quality annuities, such as TIAA traditional products, where older vintages can offer very attractive payout rates. Before surrendering or transferring these products, understand the crediting rates, liquidity restrictions, income options, and payout rates.

The Bottom Line: Building Resilient Retirement Income

Retirement income planning isn’t about collecting the highest returns – it’s about building a resilient retirement income plan that can weather various economic storms while providing the lifestyle you want.

People who succeed in retirement aren’t those chasing performance; they’re the ones who design their plans intelligently, balancing growth potential with income security.

The mathematical advantages of partial annuitization – reduced withdrawal pressure, higher effective payout rates through mortality credits, potential legacy benefits, and true longevity protection – can create outcomes that surprise even sophisticated investors.

But remember: this strategy requires careful planning, appropriate product selection, and integration with your overall financial plan. The goal isn’t to annuitize everything, but to strategically design your fixed-income allocation to deliver maximum benefit across all your retirement objectives.

As we face potential market volatility ahead – with tariff uncertainties and the conflict in Iran – having a portion of your income guaranteed can provide the emotional stability needed to let your growth investments do what they do best: grow over time.

The question isn’t whether annuities are good or bad in isolation. The question is whether partial annuitization can help you build a more resilient, less stressful, and ultimately more successful retirement income plan.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to

  • Maximize your retirement spending
  • Minimize your lifetime tax bill
  • Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal, or investment advice.

Retirement Planning for Longevity: What If You Live to 100?

What if you retired at 60 and lived to 100? That’s a 40-year time horizon in retirement – meaning you could be retired longer than you were in the workforce. While this sounds amazing on paper, it brings about an entirely different set of challenges that most people aren’t prepared for.

Most people planning for retirement think they need their portfolio to last 15, 20, or maybe 25 years. Some conservative planners might even stretch it to 30 years. But here’s the reality: if current trends in technology and medicine continue, living to 100 might not be as far-fetched as it seems.

With AI and technology potentially helping us live longer, retirement planning for longevity becomes critical. You don’t need to save less because you might live longer – you need to be more thoughtful about how you set up your retirement plan. Longevity will be one of the biggest risks for people retiring in 2026 and beyond.

Let’s explore five specific retirement planning considerations if you’re planning for a 40-year retirement.

Building Retirement Income Planning That Lasts 40 Years

The foundation of any solid retirement plan is creating paychecks in retirement. Effective retirement income planning focuses on generating cash flow because assets that don’t generate income won’t help you pay your bills.

Your retirement plan isn’t just about your portfolio – it’s about building lifetime income that never runs out. Retirement becomes much easier when your baseline necessities and fixed expenses are covered by guaranteed income sources. People who have this foundation sleep well at night, especially when markets are volatile.

Maximizing Social Security Benefits

Social Security will likely be the biggest guaranteed lifetime income stream for most retirement plans. When considering retirement planning for longevity, delaying your benefits until age 70 becomes even more valuable. This is especially important for married couples: delaying the larger benefit maximizes the surviving spouse’s income.

Remember, when one spouse dies, the surviving spouse doesn’t receive both Social Security checks. They receive the larger of the two benefits. If you’re planning for one spouse to potentially live until 100, maximizing that larger benefit becomes critical.

Pension Survivor Benefits

If you have a pension, survivor benefit options require careful consideration. Many people want to maximize what they receive during their lifetime and select a 25% or 50% survivor benefit option.  Sometimes, NO survivor benefit is selected at all. But if one spouse passes away, not only does Social Security drop, but the pension could also drop by 50% or more.

This results in a significant reduction in income for the surviving spouse, who might live another 15-20 years. When planning for longevity, protecting the surviving spouse’s income becomes paramount.

The Role of Annuities in Guaranteed Retirement Income

Annuities have become a four-letter word for many people, but they deserve consideration in retirement planning for longevity. While there are bad products and bad salespeople in this space, the concept of guaranteed income has real value.

Here’s what’s interesting: clients who have annuities never say they wish they didn’t have that guaranteed paycheck coming in. It’s usually the opposite – during market volatility, people wish they had something safe and guaranteed that they could never outlive.

Consider breaking down your expenses into needs, wants, and wishes – or simply fixed expenses and discretionary expenses. Then figure out what percentage of your fixed expenses are covered by guaranteed income sources. If Social Security covers everything, you might not need additional guaranteed income. But if your guaranteed sources only cover 30-40% of your total expenses, that could be concerning during market downturns.

Optimizing Your Retirement Portfolio Allocation for Longevity

Traditional thinking pushes retirees into conservative portfolios because they’re “living on their portfolio.” But you’re not living on 100% of your portfolio in year one – you might be withdrawing 4-7% annually. Being too conservative creates other risks, particularly inflation and longevity risk.

The Inflation Challenge

The longer you live, the more inflation compounds. Over a 40-year retirement, inflation becomes a massive risk. The best hedge against inflation is equities – traditional stocks in your portfolio. If you trim your equity allocation too much, you might not keep pace with inflation, which could be a bigger risk than market volatility.

Rethinking the 60-40 Portfolio

The traditional 60% stocks, 40% bonds allocation has been popular for retirees, but you need to stress-test it for a 40-year retirement. Bill Bengen, the creator of the famous 4% rule, recommended a minimum of 50% in stocks, with as close to 75% stocks and 25% fixed income as possible for optimal results.

When stress testing retirement portfolio allocation strategies for extended retirements, a 60-40 portfolio sometimes carries more risk than a slightly more aggressive allocation. This isn’t about putting everything in AI stocks – it’s about a well-diversified pool of equities that can hedge against inflation and longevity concerns.

Implementing Guardrails

If you choose a more aggressive allocation, you face sequence of returns risk – the danger of a bear market in your first few years of retirement. Since nobody can time the market, guardrails become essential.

Guyton and Klinger developed four decision rules for portfolio management:

  1. The inflation rule
  2. The prosperity rule
  3. The portfolio rescue rule
  4. The portfolio management rule

Following these rules throughout retirement can dramatically increase your starting withdrawal rate while reducing the risk of running out of money. The most dangerous retirement portfolio might be the one that feels safe on paper but quietly lags behind inflation for 35-40 years.

Long Term Care Planning: Protecting Your Future

Nobody likes thinking about getting old and frail, but Father Time is undefeated. Some of us will need help with daily living activities at the end of life. Long-term care planning isn’t just about buying insurance – it’s about having a comprehensive plan.

The Reality of Care Needs

About 70% of people will need some sort of care, but the duration and type vary greatly. It might be cognitive or physical care lasting two years or ten years. This uncertainty makes planning challenging but necessary.

Beyond Just Insurance

Long-term care planning involves several strategies:

  • Dedicated pools of funds
  • Long-term care insurance
  • Home equity utilization
  • Self-funding approaches

Even Warren Buffett has long-term care insurance, despite having enough wealth to self-fund care for 100 years. Why? He doesn’t want his heirs to go through a fire sale of investments to pay for care. Insurance creates a dedicated pool of funds and allows caregivers to hire help.

The Burden Factor

One common concern among retirees is: “I never want to be a burden on my loved ones.” Many people have plenty of money for retirement and care expenses, but are afraid to spend because they worry about unexpected healthcare costs.

Long-term care insurance can give people the freedom to spend their assets and enjoy retirement, knowing they have protection against care expenses. It removes the financial and logistical burden from spouses and adult children who are also worried about their own financial security.

Understanding Retirement Spending Phases

If you’re retiring at 60 and living until 100, assuming your expenses will inflate at 3% annually for 40 years might cause you to retire too late or underspend in your Go-Go Years. Retirement actually has three distinct phases with different spending patterns.

The Go-Go Years

Early retirement represents the honeymoon phase when you’re still active and physically able to do what you want. This is when you hit those bucket list golf trips, travel the world, and experience things you wanted to do while working but didn’t have time for.

Expenses might actually increase during the go-go years due to pent-up demand for activities and experiences. This is when health is in your favor, and you can be most active.

The Slow-Go Years

After checking off major bucket list items, you enter the slow-go years. You’re still traveling and active, but maybe not as frequently. Lifestyle stabilizes, and spending typically moderates from the go-go years.

The No-Go Years

Later in retirement, you enter the no-go years when physical limitations increase. While healthcare costs might spike during this phase (hence the need for long-term care planning), studies show that retirees actually experience inflation that’s about 1% lower than general inflation over their entire retirement.

Planning for Spending Changes

This spending pattern – higher in go-go years, moderate in slow-go years, and potentially lower but different in no-go years – should influence your retirement planning for longevity. Don’t assume linear expense growth for 40 years, as this might cause you to retire later than necessary.

However, if you plan to spend aggressively in your go-go years, those portfolio guardrails become critical. You need flexibility to adjust your withdrawal rate based on market performance, especially if you retire during a downturn.

Retirement Legacy Planning and Gifting Strategies

When planning for longevity, consider that if you live until 100, your adult children might be 70-80 years old when they inherit. This reality should influence your thinking about legacy and the utility of money.

The Concept of Diminishing Utility

Money has diminishing returns as you age. If you don’t enjoy money during your go-go years, you lose the utility of those dollars. The same applies to legacy. There’s a difference between giving money when your children are struggling with mortgages, private school costs, or starting businesses versus when they’re already retired.

Giving with a Warm Hand

Consider the benefits of lifetime giving versus leaving everything as an inheritance. Wouldn’t it be meaningful to see what your beneficiaries do with gifts during your lifetime? This also helps you understand their money management skills, which can inform your estate planning decisions.

If you’re gifting money and your children are using it wisely – contributing to retirement accounts, buying homes, funding education – that validates leaving them more when you’re gone. If they’re making poor financial decisions, you might want to restructure your estate plan with more protections.  Or better yet, have some meaningful conversations with those beneficiaries while you’re still alive.

Current Gifting Opportunities

The annual exclusion allows each taxpayer to give $19,000 per recipient in 2026 without filing gift tax returns. For married couples with married children, this can add up to substantial annual gifts. These gifts also remove future growth from your estate, which is particularly valuable if you face potential estate tax issues.

The key question is: when does your legacy have the greatest utility? During your lifetime, when you can see its impact, after you’re gone, or some combination of both?

Taking Action on Your Longevity Plan

Living longer can be a blessing, but it creates significant challenges for people retiring today. With technology and medicine evolving rapidly, longevity planning becomes essential for anyone approaching retirement.

Review Your Foundation

Start by reviewing your guaranteed income sources. Look at your Social Security strategy and make sure you’re maximizing not only lifetime benefits but also surviving spouse benefits. If you have a pension, carefully consider survivor benefit options.

Stress Test Your Plan

Run scenarios assuming you live until 100. Would your current plan hold up? Does a traditional 60-40 portfolio work, or do you need 75-25 or even 80-20? Test different allocations considering both your risk tolerance and risk capacity.

Address Long-Term Care

Regardless of your wealth level, you need a long-term care plan. This includes communication about who will do what, where funds will come from, and how you’ll pay for care. The goal is to remove financial and logistical burdens from your loved ones.

Plan Your Spending Strategy

Don’t assume linear expense growth for 40 years. Plan for the realities of retirement spending phases, and if you want to spend more aggressively in your go-go years, implement guardrails to protect against sequence-of-returns risk.

Consider Your Legacy Impact

Think about when your legacy will be most useful. Consider lifetime giving strategies that allow you to see the impact of your generosity while potentially providing valuable teaching opportunities for your beneficiaries.

Retirement planning for longevity requires a different approach than traditional retirement planning. The stakes are higher, the time horizon is longer, and the strategies need to be more sophisticated. But with proper planning, a 40-year retirement can be not just financially sustainable, but truly fulfilling.

If you’re looking for help creating a retirement plan that accounts for longevity, consider working with a financial advisor who specializes in retirement income planning. The complexity of planning for a 40-year retirement makes professional guidance more valuable than ever.

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to

  • Maximize your retirement spending
  • Minimize your lifetime tax bill
  • Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal, or investment advice.

Why You Should Plan for Early Retirement Even If You Don’t Plan to Retire Early

I recently met with two clients who completely changed how I think about retirement planning. Both were retiring much earlier than they had anticipated, and both situations were related to unexpected health issues. One client is now on disability, though thankfully, his wife is still working for a few more years, and he does have a disability policy in place. The other received a cancer diagnosis and is potentially retiring much earlier than planned as well.

These conversations took me back to my days studying for the RICP (Retirement Income Certified Professional) designation. There was a statistic that really resonated with me. After reviewing my coursework and notes, I found it: 51% of retirees retired earlier than anticipated. That’s right! There’s a better than 50% chance that whatever age you think you’re going to retire, you’re going to retire earlier.

The number one reason? Health issues. This reality made me realize something important. We need to stop planning for a “normal” retirement age in our assumptions, even if we end up working until 70 or 65.

The Reality of Uncontrollable Retirement Factors

Let me share another example. I’m working with a client right now who’s 62. He plans to work at least until 65, when he becomes eligible for Medicare. During the pandemic, he moved from New York to Florida. The plan was to work remotely, feel good, and coast into retirement while continuing to build his assets.

Unfortunately, the company is bringing everyone back to the office. He has two choices.

  1. Move back to New York
  2. Pick a random satellite location in Florida to work in

Neither of these is convenient based on where he now resides. So, he might retire this year.

My point is that things outside our control often lead people to retire earlier than planned. The inputs you give your financial advisor, including “I want to work until 70,” significantly impact the calculations on:

  • How much you need to save for retirement
  • How much risk you need to take
  • How long your portfolio needs to last while you’re spending it down

I don’t think it’s prudent to build those optimistic assumptions into your plan.

I recommend assuming you’ll retire at 62, 63, or 64, even if you love what you do, and genuinely want to work until 70. Then control what you can control.

Understanding Why People Retire Early

The research shows us exactly why 51% of people retire earlier than expected. Here’s the breakdown:

46% cited health reasons – This is the largest category and completely uncontrollable. Whether it’s a sudden diagnosis, chronic condition, or physical limitations, health issues force many people out of the workforce earlier than planned.

30% were laid off or offered an early retirement package – Again, this is largely uncontrollable. Company restructuring, economic downturns, or industry changes can force your hand regardless of your personal timeline.

11% needed to care for a loved one – Caring for aging parents, a sick spouse, or other family members is another uncontrollable factor that can derail retirement plans.

When you add these three categories together, that’s 87% of early retirees who left work due to circumstances beyond their control. This is why early retirement planning makes sense for everyone, not just those dreaming of early retirement.

What Changes When You Plan for Early Retirement

If you’re 55 and had been planning to work until 70, you probably had a pretty nice-looking financial plan. You’d get maximum Social Security benefits at 70, which would line up perfectly with when you start portfolio withdrawals, creating no income gap. But what happens when you plan to retire at 60 or 62 instead? Several things change, and you need to prepare for them.

1. You Need to Save More and Invest More

This one’s pretty straightforward. A good saver typically saves about 10-15% of their gross income. But if you’re planning for early retirement – even if you don’t actually retire early – I’d argue you need to save closer to 20-25% of your gross income.

I’m personally planning to have financial independence before I turn 55. Now, I love what I do and don’t see myself at 60 doing nothing. I’m having more fun in my career today than I ever have. But by planning for retirement significantly earlier, I’m building the option to quit if I want to or sell my business if I want to. That’s the power of early retirement planning – it gives you choices.

2. Healthcare Before Medicare

Medicare eligibility starts at 65, and many people work until then specifically because they’re afraid of what they’ll do for health insurance if they retire at 60, 61, or 62. But here’s what most people don’t realize: buying private health insurance or through the Affordable Care Act isn’t that complicated.

I do it with my family. It’s not cheap, but if you’re retired, your taxable income is going to be pretty low. You might have some interest income from bonds or high-yield savings accounts, maybe dividends from stocks or ETFs, perhaps Social Security or a pension. But generally, folks who retire at 60-62 have relatively low taxable income.

This low income often qualifies you for ACA subsidies. If your income is relatively low, your health insurance costs could be next to nothing – possibly less expensive than what you were paying when you were working. Don’t let healthcare force you into a job you hate until 65 just because everyone else talks about working until Medicare kicks in.

3. Stay Aggressive with Your Investment Strategy Longer

This is a mistake I see repeatedly. People preparing for retirement think, “I need this money in one, two, three, or four years, so I need to dial back my risk.” Or worse, they pick a target-date fund for 2025 because they want to retire in 2025, and these funds force you into being super conservative.

By doing this, you’re bringing inflation and longevity risk into the picture more than necessary. When I say stay aggressive, I’m not talking about putting 100% in stocks or betting everything on high-risk investments. I’m talking about maintaining a higher equity allocation than traditional retirement advice suggests.

If the benchmark portfolio for retirees is 60% equities and 40% fixed income, maybe you stay at 75% or 80% equities for the first phase of retirement. This helps you capture returns early on (assuming the market cooperates), continue building your portfolio, and protect against inflation and longevity risks that come with retiring earlier.

4. Plan for Longevity

If you retire at 60 and have longevity in your genes or excellent health, there’s a possibility you or your spouse may live 30-35 years in retirement. This goes hand in hand with staying aggressive longer – you may need to maintain a fairly aggressive investment approach throughout your retirement years to protect against inflation and longevity risks.

You also need a sound Social Security strategy to maximize survivor benefits should one spouse pass away before the other. That Social Security benefit will be one of the best inflation hedges in your retirement income plan, so you’d better maximize it if you plan to live a long life.

5. Develop a Sound Income Distribution Plan

If you plan to delay Social Security until 70 to get maximum benefits but retire at 60, that’s a potential 10-year gap where you’ll have no Social Security income. You need to replace that income with portfolio withdrawals and distributions.

Preparing your portfolio for income distributions is critical. You need a disciplined, unemotional, repeatable process to generate cash flow monthly or quarterly. We’ve all heard about buying low and selling high. When you’re accumulating wealth and saving in your 401(k) or IRA, it’s all buying – you’re purchasing shares of investments.

But in the distribution phase, you’re not just buying anymore. You’re turning the portfolio on for income. Some will come from cash flows such as interest and dividends, but others will come from selling investments each month, quarter, or year. Having a disciplined process so you’re not selling the wrong thing at the wrong time is critical for maintaining portfolio longevity when retiring early.

What Happens If You Plan Early But Don’t Retire Early?

Let’s say you do all these things and prepare to retire early, but you don’t actually retire early. What’s the impact? Nothing really negative that I can think of.

The main drawback is that you might need to tighten your belt more. If you’re struggling to save 10-15% and early retirement planning calls for 20-25%, that might be tough without working a second job or getting a significant pay raise. But if you have the capacity to save and invest more, there are only benefits.

You could potentially spend or gift more in retirement. Maybe you could build your dream home or have a vacation home free and clear. You might have better opportunities to leave a financial legacy for your children and grandchildren. You could have different risk capacity – maybe you’ve saved more than enough for retirement, which allows you to take on more investment risk to build an even larger legacy for the next generation or for charitable goals.

Maybe this also allows you to set aside funds for self-funding long-term care. Long-term care risk is one of the top risks for any retiree today – those healthcare costs at the end of life and the potential burden on loved ones. If you’ve saved more than you need for your own retirement, you can potentially self-fund long-term care.

The Benefits of Early Retirement Planning for Everyone

The beauty of early retirement planning is that it benefits everyone, regardless of when you actually retire. It’s about building financial security and creating options in your life.

When you follow early retirement planning principles, you’re essentially stress-testing your financial plan. Instead of assuming everything will go perfectly – that you’ll work until 70, stay healthy, never get laid off, and never need to care for family members – you’re planning for reality.

This approach gives you financial flexibility. If you do face unexpected health issues, job loss, or family caregiving responsibilities, you’ll have options. You won’t be forced into desperate financial decisions because you’ll have built a solid foundation.

Even if none of these challenges arise and you work until your planned retirement age, you’ll be in a much stronger financial position. You’ll have more saved, better investment strategies, and multiple backup plans. That’s not a bad problem to have.

Taking Control of What You Can Control

The key insight from all of this is focusing on what you can control versus what you can’t.

You can’t control whether you’ll have health issues, whether your company will downsize, or whether you’ll need to care for aging parents. But you can control your savings rate, your investment strategy, your distribution process, and your ability to manage risk before and during retirement.

Let’s control what we can and plan for the worst while hoping for the best. That’s what smart early retirement planning is really about – not necessarily retiring early, but being prepared for whatever life throws your way.

And if you want help planning for your retirement, we’d love to help you.  At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to

  • Maximize your retirement spending
  • Minimize your lifetime tax bill
  • Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal, or investment advice.

6 Smart Retirement Strategies When You’ve Oversaved

If you’re like most high achievers I work with, you probably spend way too much time comparing yourself to others. Maybe you’re scrolling through social media, seeing someone’s luxury vacation photos, or reading anonymous posts about retirement savings that make you question whether you’ve done enough. But what if I told you that many successful people face the opposite problem—they’ve actually saved too much for retirement?

The Gap and the Gain

This reminds me of a powerful concept I discovered in Dan Sullivan’s book “The Gap and the Gain.” Most of us live in “the gap.” We’re constantly measuring where we are against where we want to be in the future. We’re always chasing the next milestone, the next savings target, the next achievement. But there’s another way to think about your progress: measuring backwards from where you started.

When I think about my own business journey, I can either

  • Focus on how far we still need to go to reach our future goals
  • Celebrate many of the achievements that seemed impossible when we started in February 2021

The same principle applies to your retirement planning. Instead of worrying about whether you have “enough,” consider how far you’ve come from your starting point.

Many successful professionals find themselves overfunding their retirement accounts without realizing it. You’ve been disciplined savers for decades, making sacrifices and staying focused on your goals. The challenge with overfunding isn’t having too much money. It’s knowing how to optimize it for maximum impact during your lifetime and beyond.

What Does It Mean to Be Overfunded for Retirement?

Being overfunded for retirement means your financial plan shows you have significantly more resources than you need to maintain your desired lifestyle throughout retirement. In technical terms, this typically means having a Monte Carlo simulation success rate of 90% or higher.

What Is A Monte Carlo Simulation?

A Monte Carlo simulation runs 1,000 different hypothetical scenarios with varying market returns to stress-test your retirement plan. If you’re at 90%, that means in 900 out of 1,000 scenarios, you never need to make lifestyle adjustments. The remaining 100 scenarios represent extreme market conditions. For example, the “lost decade” from 2000 to 2010, when U.S. stocks were negative due to the dot-com crash and Great Recession.

Using Monte Carlo simulation results, many retirees and pre-retirees discover they have more capacity than expected. What’s particularly telling is looking at the median trial—scenario number 500—which shows your likely portfolio value at the end of your life. For overfunded retirees, this number is often two to three times their starting portfolio value, even after decades of spending on travel, gifts, and lifestyle expenses.

Here’s what this means in practical terms. If you have $2 million today, and your median ending portfolio value is $4-6 million, you’re leaving substantial wealth on the table during your lifetime. That money could be used to

  • Make memories with loved ones
  • Support family members
  • Make charitable impacts while you’re alive to see them

The reality is that $2 million today doesn’t feel as wealthy as it once did. Inflation has changed the purchasing power dramatically. In many parts of the country, a million dollars barely covers a starter home. But when your financial plan shows you’ll likely end with significantly more than you started with, despite living well, you have options that most retirees don’t.

Strategy 1: Retire Earlier Than You Initially Planned

The most obvious benefit of overfunding is the ability to retire earlier than you originally planned. I recently worked with a client in their 50s who assumed they needed to work until 62 to maximize their pension and start Social Security early. After running their numbers, we discovered they could retire today if they wanted to.

Now, I’m not suggesting you should retire just because you can financially. Retirement creates a lot of free time and mental space that needs to be filled with purpose. When you’re on the treadmill of working life, it’s difficult to step back and really think about what you want to do in your next chapter. Who do you want to spend time with? Where do you want to live? What kind of impact do you want to make?

But knowing you have the financial freedom to retire early opens up possibilities you might not have considered. Maybe you’ve always wanted to start that business venture, write a book, or serve on a nonprofit board. Perhaps you want to pursue a “second act” that’s more about passion than paycheck. When you’re focused on retirement planning over 50, overfunding becomes a real possibility that can fund these dreams.

Early retirement also allows you to gradually dial back your work commitments rather than stopping abruptly. You might

  • Reduce your hours
  • Take on consulting projects
  • Redirect the money you were saving for retirement toward other goals

The key is having a plan for what you’re retiring to, not just what you’re retiring from.

Strategy 2: Spend More Intentionally Without Guilt

You’ve earned the right to spend without guilt. After decades of disciplined saving and careful budgeting, it’s time to upgrade your experiences and lifestyle in meaningful ways.

This might mean flying first class instead of coach, especially on longer trips where comfort makes a real difference. Or staying longer at destinations—turning a week-long vacation into a month-long adventure. Many of my clients discover they can book nicer accommodations, take their entire family on trips, and create experiences they’ll remember forever.

The concept of “giving with a warm hand versus a cold one” also applies to experiences. Instead of just leaving money to your children and grandchildren, create memories together while you’re alive to enjoy them. Things like

  • Taking your family to Europe
  • Renting a house for everyone at the beach
  • Funding educational trips for grandchildren

These experiences often mean more than a future inheritance.

Intentional spending also includes services that free up your time for more important activities. Maybe you hire a housekeeper, landscaping service, or personal assistant. If you love golf but hate yard work, paying someone else to maintain your lawn gives you more time on the course. These services aren’t luxuries when they allow you to focus on what truly matters to you.

The psychological shift from “I can’t afford that” to “Is this worth it to me?” is profound. When your financial plan shows you have more than enough, spending decisions become about value and priorities rather than affordability.

Strategy 3: Take More Investment Risk for Greater Returns

What I’m about to say may seem counterintuitive. Having excess retirement funds actually gives you the capacity to take on more investment risk if you choose. When your Monte Carlo simulation shows you’ll be fine, even in market downturns lasting five or six years, you can potentially earn higher long-term returns.

Higher returns over 10, 15, or 20 years can significantly increase your ability to make an impact during your lifetime and leave a larger legacy. More money means more options for family gifts, charitable giving, and lifestyle enhancement.

This doesn’t mean being reckless with your investments. It means understanding that you have the financial capacity to weather market volatility because your spending needs are well-covered even in worst-case scenarios. You can potentially allocate more to growth investments and less to conservative bonds or cash.

The key is matching your risk capacity (what you can afford to lose) with your risk tolerance (what you’re comfortable losing). Being overfunded gives you more flexibility in this equation.

Strategy 4: Take Less Investment Risk and Sleep Better

On the flip side, being overfunded also gives you the option to reduce investment risk significantly. If you’ve been riding the market roller coaster for 30 years and you’re tired of the volatility, you’ve earned the right to step off.

This is the “if you’ve won the game, stop playing” approach. You can

  • Dial back your stock allocation
  • Increase bonds and cash
  • Focus on preserving what you’ve built rather than growing it aggressively

Sure, your returns might be lower. However, they’ll be more predictable, and you’ll still have more than enough to fund your lifestyle.

Many clients find this approach appealing as they get deeper into retirement. The peace of mind that comes from knowing your portfolio won’t drop 30% in a market crash can be worth more than the potential for higher returns.

Additionally, if you have guaranteed income from pensions or Social Security covering your basic expenses, you have even more flexibility with your investment portfolio.

Strategy 5: Gift More During Your Lifetime

The ability to make a meaningful impact on your family while you’re alive to see it is where overfunded retirement really shines. For 2025, you can gift up to $19,000 per year per recipient without filing any gift tax forms. For married couples, that’s $38,000 per recipient, and if you have multiple children and grandchildren, the numbers add up quickly.

But lifetime gifting isn’t just about the money—it’s about the conversations and lessons that come with it. When you give your adult children or grandchildren money, use it as an opportunity to teach them the financial principles that got you to where you are today. Explain

  1. Why you’re gifting the funds
  2. What you hope they’ll do with the money
  3. How you built the wealth you’re now sharing

These conversations help you understand what kind of stewards your beneficiaries will be with larger inheritances. If you gift money for a down payment but they spend it on luxury items instead, that tells you something important about their financial maturity and decision-making.

Charitable Giving

Charitable giving is another powerful option. If you’re over 70½, you can make qualified charitable distributions directly from your IRA up to $107,000 annually (in 2025) without paying taxes on the withdrawal. This is particularly valuable if you don’t need your required minimum distributions for living expenses but are forced to take them anyway.

Donor-Advised Funds

Donor-advised funds offer another flexible approach. You can bunch several years of charitable gifts into one tax year to

  1. Exceed the standard deduction threshold
  2. Get the immediate tax benefit
  3. Distribute the funds to charities over time

Strategy 6: Leave a Multi-Generational Impact

Some people prefer not to make their children’s lives “too easy” during their lifetime. It’s the belief that a healthy dose of struggle builds character. If this describes your philosophy, being overfunded gives you the opportunity to impact multiple generations with the wealth you’ve created.

Think about the power of compound growth over decades. A $2 million portfolio that grows to $8-10 million by the time you’re 90 could

  • Fund college educations for great-grandchildren not yet born
  • Start family businesses
  • Create charitable foundations that operate in perpetuity

If this is your plan, you need to be extremely thoughtful about the structure.

  1. How will the money be distributed?
  2. At what ages can beneficiaries access funds?
  3. What are the funds intended for?
  4. Should assets be held in trust with professional management?

More importantly, you need to have conversations with your family about how you built this wealth and what it represents. Share the story of your sacrifices, discipline, and decision-making. Help them understand that this money isn’t just a windfall—it’s the result of decades of intentional choices.

I think about my great-grandfather, who built a rice mill business in China and Burma. His multi-generational impact allowed my father to attend prestigious schools in India and eventually immigrate to the United States. That legacy shaped our entire family’s trajectory across multiple generations.

However, be aware of the tax implications of leaving large retirement accounts to the next generation. With the 10-year distribution rule for inherited IRAs, your beneficiaries may face substantial tax bills if they’re successful in their own careers. Strategic Roth conversions during your lifetime can help minimize this tax burden and preserve more wealth for your family.

Making the Most of Your Overfunded Retirement

If you find yourself being someone who has saved diligently and has more than enough for retirement, you have options that most people don’t. The key is shifting from a scarcity mindset to one of abundance and intentionality.

Remember the Gap and the Gain concept. Instead of constantly measuring yourself against others or future goals, take time to appreciate how far you’ve come. You’ve achieved something remarkable through decades of discipline and smart decisions.

You may choose to

  • Retire early
  • Spend more intentionally
  • Adjust your investment risk
  • Increase your gifting
  • Plan for multi-generational impact

The most important thing is making conscious choices about your wealth rather than letting it accumulate by default.

Your financial plan isn’t a one-time event. It’s an ongoing process that should evolve as your circumstances and priorities change. What feels right in your first year of retirement might be different after five or ten years of experiencing financial security.

The goal isn’t just to have enough money for retirement. The goal is to use your resources in ways that align with your values and create the kind of impact you want to make during your lifetime and beyond. When you’re overfunding retirement, you have the luxury of choice. Make sure you’re making those choices intentionally.

Ready to discover if you’re overfunded for retirement? A comprehensive financial plan can help you understand your true capacity and explore strategies to optimize your wealth for maximum impact during your lifetime.

How We Can Help

At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to

  1. Maximize your retirement spending
  2. Minimize your lifetime tax bill
  3. Worry less about money

You can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.




Bear Market Preparation: 14 Retirement Planning Moves to Protect Your Wealth

The markets have recovered all of the losses from “Liberation Day,” AND SOME, so far in 2025.  Many investors have stopped worrying about tariffs, and are now looking at a high likelihood of the Fed cutting interest rates at their next meeting in September.

However, it’s crucial to begin preparing for the next bear market or recession before they actually happen. You’d rather be in proactive mode, rather than reactive mode!  In this article, I’ll discuss 14 retirement planning moves to help you prepare for the next bear market because it’s not a question of if, but when.

What Is a Bear Market?

Before diving into preparation strategies, let’s clarify what a bear market actually means. A bear market is defined by a decline of 20% or more in one of the major stock indexes over at least two months. A correction, on the other hand, is a 10% decline from previous highs.

Since 1964, the S&P 500 has experienced 27 corrections. In eight of those 27 instances (about 30%), the correction led to a bear market. Typically, bear markets last about 10 months on average, though some have lasted significantly longer.

Some notable bear markets include:

  • The Great Depression (1929-1932): The Dow dropped 86%
  • The Global Financial Crisis (2008): The S&P 500 declined by about 56%
  • The Dot-com Bubble (2001-2002): The S&P 500 fell about 50%, while the NASDAQ dropped almost 78%
  • The COVID-19 Pandemic (2020): The S&P 500 declined about 34% but fully recovered two months later
  • The Triple Bear Market (2022):  Stocks, bonds and cash were all in bear market territory as of June of 2022.  It lasted about 9 months, but the inflation effects are still lingering. 

Bear markets are part of the economic cycle. We experience booms and busts, expansions and contractions, peaks and troughs. With current concerns about tariffs, geopolitical conflicts, inflation, and interest rates, there’s significant uncertainty in the markets.

Now, let’s explore 14 strategies to prepare for the next bear market.

1. Prepare Your Mindset

Bear market preparation begins with your mindset. Bear markets are a normal part of investing. You didn’t accumulate seven figures by being scared of investing. You took on risk to achieve your desired returns.

The challenge is that as you get closer to retirement, volatility becomes more concerning because you’re transitioning from accumulation to needing to live on your portfolio. This is completely normal.

Remember that bear markets happen on average about every five years. Even when you retire, you’ll need to keep some money invested in the stock market to keep pace with inflation. If you have a 30-year retirement horizon, you can expect to live through approximately six bear markets during retirement.

2. Prepare Your Investment Portfolio

One of the most critical aspects of preparing for a bear market is having a properly structured investment portfolio. It’s easier to think about this during periods of volatility, but it’s even more important to implement when things are going well.

Think back to 2023 and 2024, when the S&P 500 delivered back-to-back returns exceeding 20%. After Trump won the election in late 2024, there was almost a euphoria in the markets with expectations of reduced regulations, tax cuts, and increased domestic manufacturing. This “Trump bump” created a situation where things were running hot—a common occurrence toward the end of a boom cycle.

Instead of riding that wave based on emotion, a disciplined, unemotional, repeatable process of rebalancing can prevent you from becoming overexposed to risk. This means:

  • Having specific targets for each asset class
  • Trimming winners and taking gains off the table
  • Buying underweight positions that might be underperforming

You can’t magically implement this in the middle of a bear market. You need to enter each year with a defined investment policy statement and strategy for each account—your taxable brokerage account, traditional IRA, 401(k), and Roth accounts.

For example, if your S&P 500 allocation increases significantly due to strong performance, consider reallocating some of those gains to areas that may have underperformed, such as fixed income or cash. This disciplined approach helps prevent emotional decisions when markets turn, which typically happens quickly.

3. Build Your War Chest

Investing in a down market requires having cash available. Building up your “war chest” is crucial for both protection and opportunity.

If we enter a bear market, there’s a decent chance we’re already in a recession or heading into one. The market is a leading indicator, typically declining before economic data confirms a recession. Having cash on hand helps if you lose your job or face reduced income during economic downturns.

But if you’re fortunate enough to keep your job during a bear market, cash becomes king for finding buying opportunities. As Warren Buffett famously said, “Be fearful when others are greedy and be greedy when others are fearful.”

Consider this eye-opening statistic: 56% of the best days in the S&P 500 occur during bear markets. Another 32% happen in the first two months of a bull market. That means 88% of the best market days happen when most people aren’t feeling optimistic about investing.

This war chest could be:

  • Cash within your investment portfolio
  • Cash alternatives in your investment portfolio
  • Increased contributions to retirement accounts during downturns
  • Front-loading contributions to take advantage of buying opportunities

It won’t feel natural to add money when markets are down. Imagine being told to add more money to your portfolio during the pandemic, when it had already dropped 30-40%. Most people want to take money out, not put more in. But that’s precisely when the greatest opportunities arise.

4. Plan Your Retirement Cash Flow Sources

Having a plan for where your retirement cash flows will come from is essential during market volatility. Let’s use a simple example:

If you have a $1 million portfolio with a 60/40 split ($600,000 in equities and $400,000 in fixed income), and you need $40,000 annually (a 4% withdrawal rate), you effectively have 10 years of income in fixed income without touching your stock portfolio.

Given that bear markets typically last about 10 months, with the longest in our lifetime being around five years, having 10 years of income in fixed income should provide significant peace of mind.

Additionally, if your portfolio generates income through interest and dividends—let’s say 2.5% overall—and your withdrawal rate is 4%, you only need to rely on capital sales for about 1.5% of your portfolio. That’s manageable even during market downturns.

During strong markets, like 2024, you can generate income by trimming gains from equities. When markets turn, as in early 2025, you can draw from fixed income or cash alternatives while waiting for stocks to recover.

5. Optimize Your Social Security Strategy

Social security planning is a critical component of retirement in a bear market. The timing of when to claim Social Security can significantly impact your retirement income floor.

If you delay Social Security until full retirement age or age 70, you’ll have a higher benefit base that will also receive cost-of-living adjustments. This creates a higher guaranteed income floor in retirement, which provides peace of mind during market volatility.

For example, if 60% of your cash flow needs come from fixed income sources like Social Security, you won’t need to rely as heavily on your investment portfolio during volatile periods.

If you’ve already retired and planned to delay Social Security until 70, but then face a bear market or recession, you have options. You could elect to start benefits earlier and then:

  1. Continue them indefinitely, or
  2. Stop them at full retirement age and then preserve delayed retirement credits until age 70

This flexibility allows you to adapt your strategy based on market conditions while still maintaining long-term income security.

6. Consider Part-Time Work

While not everyone’s favorite suggestion, considering part-time work during market downturns can be a valuable option. The goal in retirement is for work to be optional, not mandatory. However, even if you don’t mathematically need to work to preserve your portfolio, it might provide peace of mind.

Instead of drawing down your portfolio during a bear market or recession, finding fulfilling part-time work or a side hustle can reduce your withdrawal rate and put less pressure on your investments while they recover.

7. Evaluate Roth Conversion Opportunities

Roth conversions during market downturns present an interesting opportunity. When converting from pre-tax to Roth accounts, you pay taxes on the converted amount. If market values are down, you can convert the same number of shares at a lower tax cost.

If you believe in the long-term prospects of your investments, converting when valuations are down allows the eventual recovery to happen in the tax-free Roth environment rather than in your tax-deferred accounts.

The challenge is timing—you want to convert at the right moment. If you convert and the market continues to decline, you’ve paid taxes on a higher value. Typically, Roth conversions are best done toward the end of the year when you have a clearer picture of your annual income and tax situation.

8. Consider Gifting Securities at a Discount

Similar to Roth conversions, gifting stock or securities during market downturns can be advantageous if you regularly gift to family members or irrevocable trusts. Instead of gifting securities at higher values, you can gift them when values are down, allowing for a lower gift amount.

The eventual appreciation will be on the recipient’s balance sheet rather than yours. The value of this strategy depends on how much you’re gifting and the long-term outlook for the investments.

9. Implement Tax Loss Harvesting

Tax loss harvesting is a powerful strategy during market downturns. This involves selling investments at a loss in a taxable brokerage account (not retirement accounts like IRAs or 401(k)s) to realize the loss for tax purposes.

These realized losses can offset capital gains in the current year or be carried forward to offset gains in future years. If you have no capital gains, you can deduct up to $3,000 against ordinary income annually.

The key is to replace the sold security with something similar immediately but not “substantially identical” to maintain your market exposure. For example:

  • You can’t sell Apple and buy Apple back (that’s substantially identical)
  • You could sell Apple and buy Microsoft (not substantially identical)
  • For funds, you might switch from a Fidelity S&P 500 fund to a Vanguard Large Cap stock fund (also not substantially identical).

The “wash sale rule” prevents you from claiming the loss if you buy the same or substantially identical security within 30 days before or after the sale.

During the 2022 bear market, our clients built up significant tax-loss “war chests” that they’re still using to offset gains or reduce ordinary income.

10. Create Guaranteed Income with Fixed Annuities

Leveraging annuities to create guaranteed income can provide significant psychological benefits during market volatility. Social Security is essentially an annuity, but additional guaranteed income sources can enhance your retirement security.

The higher your guaranteed income floor, the more peace of mind you’ll have when markets are volatile. If guaranteed sources cover 60-70% of your income needs, short-term market fluctuations become less concerning.

For example, one client recently activated an annuity income stream with a 7.6% payout rate—significantly higher than what would be prudent to withdraw from an investment portfolio. This guaranteed income, combined with Social Security, covers about 70% of her cash flow needs, providing tremendous peace of mind during market volatility.

11. Leverage Cash Value Life Insurance

If you already have cash value life insurance, it can serve as a valuable resource during market downturns. It takes years or decades to build significant cash value, but once established, it can be a stable asset during volatility.

Unlike stocks or bonds, cash value in traditional life insurance policies typically doesn’t decrease in value during market downturns. You can access this cash through withdrawals, partial surrenders, or policy loans while waiting for markets to recover.

During the March 2020 market bottom, some investors used policy loans from their life insurance to invest in the market at discounted prices, capitalizing on the opportunity while maintaining their existing investments. Or if retired, they used that cash value as income instead of tapping into their stock allocations.

12. Consider Home Equity Options

Your home equity can serve as a last line of defense during severe market downturns. Options include:

  • Home Equity Line of Credit (HELOC): Opening a HELOC before things get bad provides access to a cash reserve that you don’t have to use unless necessary. While there are interest costs if you tap into it, having $100,000-$200,000 available can provide significant peace of mind.
  • Reverse Mortgage (if over 62): This can create a cash bucket similar to a HELOC without requiring monthly payments.

Home equity is often an underutilized asset class. Creating liquidity within your home equity can provide additional security if stock and bond markets experience severe downturns.

13. Trim Concentrated Stock Positions

Market downturns can present good opportunities to reduce concentrated stock positions. Many clients have significant concentrations in individual stocks, often from employer stock plans. These positions can be difficult to sell for two reasons:

  1. Behavioral attachment: The stock helped build their wealth, and they’re emotionally connected to it.
  2. Tax consequences: Selling may trigger significant capital gains taxes.

During market volatility, stock prices decline, making the tax consequences less painful. A position that might have generated $100,000 in taxes during a bull market might only generate $50,000 in taxes after a decline.

For example, a client with 45% of their portfolio in Microsoft stock is using the recent volatility to reduce their concentration to 30% with minimal capital gains due to the market decline.

If you have concentrated positions (generally defined as over 5% exposure to a single stock), market downturns can be an opportune time to rebalance toward a more diversified allocation with a lower tax bill.

14. Do Nothing

Sometimes, the best strategy during market volatility is to do nothing. Acting on emotion or making rash decisions during volatile periods can significantly damage your long-term plan.

If you’re uncomfortable with the 13 strategies mentioned above, it might be better to simply wait it out rather than make emotional decisions—unless you completely lack a financial planning strategy to begin with. In that case, consulting with a professional advisor would be beneficial.

Doing nothing is certainly better than abandoning a well-diversified, thoughtful investment strategy due to short-term market movements.

Final Thoughts on Bear Market Preparation

I don’t want to dismiss anyone’s emotions during volatile markets. Transitioning from working to retirement is already emotionally charged, with concerns about aging, health, and this next chapter of life. Market volatility adds another layer of stress.

However, having a trusted partner to lean on during these times can make all the difference. Someone who can coach you to stick to a long-term, disciplined strategy can help you navigate market turbulence with confidence.

Remember, bear markets are not a function of if, but when. With proper bear market preparation, you can not only protect your retirement savings but also potentially capitalize on opportunities that arise during market downturns.

As market volatility continues to make headlines, there’s no better time than now to evaluate which of these bear market preparation strategies align with your retirement goals and take decisive action to protect the financial future you’ve worked so hard to build.

This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.




6 Retirement Planning Strategies for When You’re Feeling Behind

Are you feeling a little bit behind regarding your retirement plans? Well, you are not alone. In fact, over 57% of Americans today are feeling behind relative to their goals for retirement. In this blog post, we’re going to talk about six retirement planning strategies that may improve your potential outcomes for a successful retirement.

Retirement Planning: Why 57% of Americans Feel Behind

I’m sure each participant in this study has their own story.  However, the fact is that we live in a world of comparing ourselves to others, unfortunately.  Therefore, regardless of how well you’ve saved and invested up to this point, it’s completely normal to feel “behind.”  With that said, some of you truly are behind. Whether you were focused on

  • Building your careers or businesses
  • Raising children (which are VERY expensive)
  • Paying for private school or college
  • Caring for aging parents

There are countless reasons as to why you might be behind. 

However, implementing effective retirement planning strategies can significantly improve your financial outlook, even if you’re starting late. The transition from active income to passive income can be scary for many people. Additionally, it’s the fear of spending down the portfolio and worrying about uncertain events down the road that leads to serious anxiety as you approach quitting your day job.

At the same time, many folks tend to sacrifice those early years of retirement, what I like to call the “Go-Go Years.” This period of time is when you’re healthy and physically able to do the things you may want to do – traveling the world or spending precious time with your grandkids, whatever that might be.

I believe there must be a healthy dose of cautious optimism to implement a successful retirement plan. 

Let’s dive into six strategies that can help improve your retirement outcomes, give you greater peace of mind, and provide greater confidence as you approach this next chapter.

Strategy 1: Increase Savings Rate and Maximize Contributions

Let’s start with the low-hanging fruit.  Saving more is something primarily in our control, and certainly can move the needle if you have a few years left until you plan to retire.  Catch-up contributions are powerful retirement savings strategies for those over 50 who need to accelerate their nest egg growth. If you’re over 50, there are catch-up retirement plan contributions available for 401(k) plans as well as individual retirement accounts. Once you hit 55, there’s also a catch-up for Health Savings Accounts (HSAs).

401(k) Contribution Limits

If you’re over 50, you can contribute $31,000 into a 401(k) plan for employee contributions in 2025 (this includes the $7,500 catch-up for ages 50+). That’s important to note because I’ve seen people make this mistake before. They say, “I’m putting in $20,000 and my employer matches me $11,000, so I’m maxing my 401(k).”

That’s actually not true. The $31,000 is only related to employee contributions. Employer contributions are on top of that.

The total contribution limit in 2025 for ALL sources (employee, employer, and voluntary after-tax) is $77,500 for 2025.  This includes the $7,500 age 50+ catch-up contribution.

This applies to 401(k)s, 403(b)s, Thrift Savings Plans if you’re in the federal government, and 457 plans if you have one available.

Super Catch-Up Contributions

Thanks to the Secure Act 2.0, there’s now a “super catch-up contribution” available. Instead of the $7,500 extra that you can put into these plans, you can put in $11,250 if you’ve turned 60, 61, 62, or 63 in 2025 and beyond. That’s an additional $3,750 on top of the regular catch-up.

IRA Catch-Up Contributions

An Individual Retirement Account has a maximum contribution of $7,000 per year, whether it’s a Traditional or Roth account. If you put $3,500 into a traditional IRA, you can only put $3,500 into a Roth IRA.

If you’re over 50, you get an extra $1,000 catch-up, bringing your total to $8,000.

There are income thresholds you need to consider if you are looking to contribute to a Roth IRA or make a tax-deductible contribution into a Traditional IRA.  So, make sure to consult with your tax professional and financial advisor to confirm these limits.

Mega After-Tax Contributions

Many employers today are adopting what’s called the Mega After-tax Roth Contribution in their 401(k) plans. This allows for additional contributions beyond the employee and employer amounts, up to the total limit of $77,500 (for folks over 50).

Example:

If you’re putting in the max employee contribution of $31,000 and your employer matches $10,000, you’re at $41,000. You could potentially put up to an additional $36,500 into the 401(k) plan on an after-tax basis. 

The key factor, however, is making sure that after-tax contribution can be converted to Roth immediately!  This can often be done within the 401 (k) or to your Roth IRA.  Additionally, your plan administrators will calculate the exact amount allowed to the after-tax side, and this will be spelled out in your benefits details. 

This essentially allows a highly compensated employee to contribute tens of thousands of dollars into the Roth portion of their assets without worrying about the income phaseouts associated with Roth IRA contributions. 

HSA Contributions

HSAs are my favorite investment account for retirement because you get the trifecta tax benefit:

  • Pre-tax contributions (fully deductible regardless of income)
  • Tax-free growth
  • Tax-free distributions (as long as they’re used for qualified medical expenses)

Once you turn 55, you get an extra $1,000 catch-up. In 2025, for individual plans, you can contribute $4,300 plus $1,000, totaling $5,300. For family plans, it’s $8,550 plus $1,000, totaling $9,550.

Unlike a Flexible Spending Account (FSA), these accounts do not need to be emptied on an annual basis.  Therefore, if you can pay medical costs out of pocket for the year, it’s wise to allow the triple tax benefits to work in your favor until you fire your boss and retire.  This will serve as a nice tax-free income during retirement, or even perhaps serve as a self-funding mechanism for long-term care costs. 

Just make sure you spend these accounts during your lifetime, as any amounts left to children will be a tax bomb for them!

Strategy 2: Working Longer to Improve Retirement Outcomes

Working longer probably makes more of an impact than any of these other strategies in the long term. Delaying retirement by just one, two, or three years can significantly improve your financial outlook.

This doesn’t have to be in your current job. Maybe you’re a physician, working an intense tech job, or in a physically demanding blue-collar position that you can’t continue much longer. You could retire from your current role but transition to something else, perhaps even part-time.

Having one or both spouses doing something part-time to earn extra income can help bridge the gap years—the period between when you retire and when you start taking guaranteed income sources like Social Security or pension income. Those gap years can be stressful if you have no income coming in and are relying entirely on your portfolio, especially during times of market volatility.

The extra income allows you to delay portfolio withdrawals or reduce them, maximizing your Social Security benefits and allowing your tax-deferred and tax-free savings to continue growing.

Strategy 3: Review Your Spending Assumptions and Retirement Budget

Many people assume they’ll need their current spending level, adjusted for inflation, throughout their entire retirement. But retirement spending typically occurs in three distinct phases:

  1. The Go-Go Years: When you’re active and traveling
  2. The Slow-Go Years: When you start to slow down
  3. The No-Go Years: When mobility becomes more limited

In the go-go years, your spending may even go up compared to your working years.  After all, every day is Saturday. But these years probably won’t last forever. Therefore, it likely doesn’t make sense to assume that level of spending forever.

There is an argument that healthcare costs might be lower at the beginning of retirement, while discretionary expenses are higher. Then, over time, discretionary spending decreases while healthcare costs rise, particularly for long-term care. If you have unexpected healthcare costs later in retirement, you want to be prepared to maintain your independence and dignity without relying on family members.

This is where long-term care insurance can be valuable. It eliminates the potential risk of needing to spend down your portfolio for care, which could impact your spouse’s financial security, especially considering women typically outlive men.

Studies have shown that retirees lag inflation by about 1% a year over time. If general inflation is 2%, your experienced inflation might only be 1% because many of your expenses are fixed. Your mortgage might be paid off, or your property taxes might be homesteaded and not increase at the full rate of inflation.  The inflation assumption might be one of the most critical variables when you are mapping out your spending needs and the viability of retirement success.

Strategy 4: Finding the Right Asset Allocation for Retirement Investing

Adjusting your retirement investing approach as you age is crucial for balancing growth potential with risk management. One of the things you can control is your long-term asset allocation. The higher exposure you have to equities (stocks), the higher long-term rate of return you should expect, though it’s not guaranteed.

One of the biggest mistakes I see retirees make is getting too conservative too early in retirement. They reach 60 or 65 and think, “I’m done accumulating, now I’m transitioning to the distribution phase. I was 70% in the stock market, I’m going to go down to 20% or 25%.”

That’s a no-no, especially if you’re borderline in terms of being funded or not well-funded. The higher expected rate of return you have in your portfolio, the more likely you are to achieve your long-term goals.

However, there’s a fine line. If you go 100% in stocks and retire into a market downturn, that’s not good either, because you’ll have to sell stocks at the wrong time.

Bill Bengen’s 4% rule assumed an asset allocation of 50% equities (S&P 500) and 50% in government bonds (10-year Treasury). However, he suggested that as the minimum equity exposure, but actually leaned toward 75% in equities if you have the risk tolerance.

If you’re a bit behind for retirement, you don’t have the capacity to get ultra-conservative. Going too conservative brings other risks into play:

  • Interest rate risk
  • Inflation risk
  • Longevity risk.

Consider a bucketing strategy where you align your asset allocation with different accounts:

  • More conservative investments in your taxable accounts that you’ll tap first
  • Moderate risk in your tax-deferred accounts
  • More aggressive investments in your Roth accounts that you’ll access later

Strategy 5: Consider Relocating for Financial Benefits

Considering relocation could be a strategy to boost your chances of success. This retirement planning strategy can be particularly effective if you’re moving from a high-cost-of-living area to a lower-cost one.

For example, suppose you’re selling a house in New York worth $1.2 million and moving to Florida or Tennessee. In that case, you might be able to buy a comparable or better home for $700,000, leaving you with $400,000 to invest (after accounting for closing costs and taxes).

This cost-of-living arbitrage can significantly improve your retirement outlook. However, it’s essential to consider more than just the financial aspects:

  • Where are your adult children and grandkids?
  • Where is your circle of friends?
  • What about healthcare facilities and doctors?
  • Is the infrastructure (roads, schools, hospitals) adequate?

Before making a permanent move, consider renting for six months or a year to make sure the location is right for you.

Strategy 6: Utilize Home Equity

Don’t be afraid to use your home equity in retirement. I often see folks whose largest asset is their paid-off home, worth $750,000, $1 million, or more. They don’t want to sell it because they like it and want to age in place there.

However, if that home equity is added to their financial legacy upon passing, and it impacts their standard of living during retirement, they may have missed out on valuable experiences, opportunities to gift to their children, travel, or access to better healthcare.

One way to tap into home equity without selling is through a reverse mortgage, available once you turn 62. This gives you access to your home equity as an emergency fund, line of credit, or even income payments for life. It will reduce the equity you leave behind, but you can age in place and won’t have to pay back the loan during your lifetime.

Home equity can also be a great source for funding long-term care if you can’t buy insurance due to pre-existing conditions. Using home equity for this purpose can free up your retirement assets for lifestyle expenses rather than reserving them for potential care needs or financial legacy goals.

Additional Retirement Planning Strategies to Consider

Maximize Social Security Benefits

If you’re feeling a bit underfunded, maximizing your Social Security benefit can do wonders. Delaying until 70 (the latest retirement age) or at least until full retirement age gives you a higher baseline that adjusts with inflation long-term.

Consider Life Annuities

A life annuity that continues paying for as long as you live can provide peace of mind, especially if you’re concerned about market downturns affecting your portfolio.

Rethink Roth Conversions

Roth conversions may not be right for you if you’re behind on retirement savings. They require front-loading taxes early on, which could impact your breakeven long-term, especially with an underfunded plan. You can’t convert your way to a successful retirement.

Implement Tax-Efficient Withdrawal Planning

Which accounts you tap first matters. The traditional approach is taxable first, then tax-deferred, then tax-free. But you might consider a combination approach to maximize certain tax brackets, or even prioritize spending down tax-free assets if you plan to leave tax-deferred accounts to heirs in lower tax brackets or to charity.

Stress Test Your Plan

Use Monte Carlo simulations to test different scenarios, including bear markets at the beginning of retirement and different inflation rates. Be flexible and fluid with your plan, making adjustments as needed.

Consider using “guardrails,” where you start with a certain withdrawal rate and adjust spending accordingly if markets perform poorly or better than expected.

Financial Planning for Retirement: Getting Professional Help

Retirement planning requires a comprehensive approach that considers savings, investments, and potential lifestyle changes. With these six retirement planning strategies, you can improve your retirement outlook even if you’re feeling behind right now.

If you’re unsure whether you’re on track and don’t want to figure it all out yourself, consider working with a financial planner. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

This is for general education purposes only and should not be considered as tax, legal or investment advice.

6 Reasons to Take Advantage of a Roth Conversion

While I recently outlined reasons to steer clear of a Roth conversion, today I’m flipping the coin to explore when it can be a smart, strategic move for your financial future.

Why Consider a Roth Conversion During Market Downturns

A Roth conversion can be particularly beneficial during market downturns. When the market is down, you’re essentially exchanging a number of shares based on the dollar amount you want to convert from your tax-deferred account (whether it’s an IRA or a 401k) into a Roth.

You’ll have to pay taxes now in exchange for tax-free growth, which is the advantage Roth accounts offer. When markets are down, you can convert more shares with the same dollar amount.

For example, if you were looking to convert $50,000 worth of Vanguard’s Total Index (VTI) back in 2022 (the last bear market), you’d be able to convert an additional 25% worth of shares because the market was down roughly 25% that year. Just a thought, given we had some rough patches this April with the tariff concerns. We could continue to see more volatility in the months ahead.

While we can’t control market volatility, we can control smart tax planning. Let’s jump into the top six reasons you may consider a Roth Conversion in your financial planning strategy.

1. For Accumulators: Backdoor Roth IRA Strategy

The first reason is actually for people who are pre-retirement, or what I call “accumulators.” There are income thresholds for single and married filing jointly to directly contribute to a Roth IRA. If you fall into that category, the Roth conversion or backdoor Roth IRA strategy comes into play.

Essentially, you’ll make a non-deductible contribution into an IRA and then convert those assets into a Roth IRA. There are some tax traps you might fall into (the aggregation rule), so consult with your tax planner or financial planner before making this move. This strategy is available for IRAs, and sometimes, for 401ks as well. Contribution limits are much higher for 401ks than IRAs. If you have this option within a 401k, this could really boost your retirement savings.

2. Tax-Free Growth Long-Term

Reasons 2 through 6 are for individuals nearing retirement who have accumulated substantial savings in tax-deferred IRAs or 401ks.

The second reason is for long-term tax-free growth. If you believe tax rates probably aren’t going down and are more likely to go up or stay the same, then tax-free growth and compounding interest are much more powerful than tax-deferred growth. This could be for legislative reasons, or even simply projecting out your lifetime tax brackets. We know now that the One Big Beautiful Bill Act has made the current brackets permanent. Still, that doesn’t mean YOUR tax bracket might rise over time based on changes in your income or assets.

3. Eliminate or Reduce Required Minimum Distributions

A Roth conversion can eliminate or reduce your required minimum distributions. Required Minimum Distributions (RMDs) are mandatory withdrawals from traditional retirement accounts (IRAs, 401ks, 403bs, TSPs, 457bs, etc.) that the IRS requires once you reach a certain age. The beginning age is currently 73 if you were born before 1960, or 75 if you were born in 1960 or later. RMDs could potentially push your income into higher tax brackets later in retirement when spending actually might go down. Furthermore, if you don’t need all that income, it forces you to realize it anyway to avoid the 25% penalty for a missed RMD.

4. Save Money on Medicare Premiums

Many people don’t realize that when you sign up for Medicare, you might find yourself paying MORE for Medicare Part B and D. Part A is free, and everyone has the same base premium for B and D. However, the more money you make in retirement, the chances of triggering an “IRMAA” surcharge goes up.

IRMAA stands for Income-Related Monthly Adjustment Amount. There are 5 different premium tiers, and each tier increases your IRMAA surcharge. You can also look at it like an excise tax. The more you’ve saved in tax-deferred vehicles (401ks and IRAs), the higher those RMDs might be. More income from RMDs means your Medicare premiums may go up.

5. Reduce the “Surviving Spouse’s Tax Penalty”

The likelihood that a married couple passes away in the same year is very low. Most of the time, women outlive men, or one spouse outlives the other by many years. This is especially relevant if there is a significant age gap between spouses.

Filing jointly is much more tax-advantaged for most people. The surviving spouse will have to switch to filing single, typically the year following the initial spouse’s passing. This could result in pushing the surviving spouse into a much higher tax bracket than when they could file jointly.

Taking this into consideration to ensure you’re not placing your surviving spouse in an unfair or unfavorable tax situation upon your passing is a compelling reason to convert assets from traditional to Roth.

6. Address Changes from the SECURE Act

With the SECURE Act going into effect at the end of 2019, we’re seeing the largest acceleration of taxes on retirement assets that we’ve ever experienced. Essentially, the stretch IRA is eliminated for most non-spousal beneficiaries. With the stretch IRA, beneficiaries could “stretch” their IRA withdrawals over THEIR life expectancy. However, the SECURE Act now requires most beneficiaries to liquidate the entire retirement account by the end of the 10th year. This could result in pushing your heirs into an unfavorable tax bracket, especially if they are successful in their own right. We hear all the time that our clients’ children are making more than they ever made! Couple this with large IRAs or 401ks as an inheritance in their peak earning years, and you can see the potential tax trap this brings about. We call it “The Death Tax Trap of 401ks.”

This acceleration of taxes is a big reason to convert from tax-deferred accounts to tax-free accounts. When Roth accounts pass to the next generation, the beneficiaries can enjoy tax-free distributions of the assets instead of tax-deferred distributions.

Understanding the Roth IRA Conversion Process

The concept of a Roth Conversion is essentially to pay the tax now as opposed to deferring those taxes in an IRA or 401k. If you follow the appropriate 5-year rules, everything that grows and compounds in that account, along with the withdrawals, should be tax-free in retirement.

Compare that to a traditional IRA or traditional 401k. These plans give you a tax deduction upfront, but all of that compounding interest and distributions in the back end are taxed as ordinary income in retirement.

Many of my clients over 55 have accumulated the majority of their retirement assets in tax-deferred vehicles, such as 401(k)s and/or IRAs. They may be concerned about the future direction of taxes, particularly given the funding levels of Medicare, Medicaid, and Social Security.

The general concept is: does it make sense to pay taxes now at a potentially lower rate and enjoy tax-free compounding as opposed to tax-deferred compounding going forward?

The Tax Trap of Traditional 401(k)s and IRAs

The impact of Required Minimum Distributions are oftentimes one of the biggest tax traps of 401ks and IRAs. Because our clients were diligent savers during their working years, they accumulated substantial assets in 401(k) plans and IRAs. When they turn 73 or 75, they’re forced to take out a certain percentage of those retirement accounts each year.

As your life expectancy shortens, the amount you’re required to take out increases. You start out at a little under 4%, and by the time you get to 90, you’ll be taking out north of 8% of your retirement account, whether you need it or not.

Think about what that can do to your taxable income, Medicare premiums, and ultimately, how those assets are passed on to the next generation. This tax trap is what we’re trying to solve well before clients hit that magic age.

Planning for Longevity in Retirement

More and more people are living longer, often into their 90s. The life expectancy of a 62-year-old female includes a 30% chance of living until 96. When planning with clients over 55 or 60, we may be looking at a retirement of 30 years or more, even longer than their working years.

You must consider this in light of the high inflation we have experienced these past few years. The cost of goods going up over that retirement period on a potentially fixed income is worrisome for many clients. That’s what we try to plan for and mitigate inflation risk coupled with longevity risk.

The Retirement Red Zone

I call the period ten years before you retire and the ten years after you retire the “Retirement Red Zone.” Decisions are magnified, and mistakes are magnified if you make the wrong move.

From an investment perspective, that’s important, especially during volatile times. Certainly, from a tax perspective, which also contributes to the long-term rate of return on your portfolio. This is something I aim to help my clients with as they prepare.

Strategic Planning for Retirement Success

While nobody can predict the future of taxes, you can take the known variables and project out your estimated lifetime tax rates. You will find that throughout retirement, there could be some opportunistic times when your income goes way down. If you’re making strategic moves during that time frame, such as Roth conversions, that planning can help position your retirement assets for better long-term growth and tax efficiency.

Remember, the planning doesn’t stop after retirement, it just changes. Whether you are on the brink of retirement or you’ve been retired for several years, having good guidance at every stage of the process is crucial for achieving financial peace and security in retirement.

Take a deeper dive into this topic by listening to Episode 10 of The Planning for Retirement Podcast. This is for general education purposes only and should not be considered as tax, legal or investment advice. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions.

If you are looking to maximize your retirement spending, minimize your lifetime tax bill, and worry less about money, you can start with our Retirement Readiness Questionnaire linked on our website at www.imaginefinancialsecurity.com. Click the “Start Now” button to learn more about our process and how we might be able to help you achieve a more confident retirement.

Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.

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